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Using an Improved Taylor Rule to Predict When Policy Changes Will Occur

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  • Charles T. Carlstrom
  • Saeed Zaman

Abstract

A standard Taylor rule, which expresses the federal funds rate as a function of inflation, the unemployment gap, and the past federal funds rate, tracks the federal funds rate well over time. We improve the fit by adding employment growth. Then we evaluate the effectiveness of that rule in a new way?by how accurately it predicts whether the FOMC moves the fed funds rate at its next meeting. It does pretty well, predicting nearly 70 percent of the time correctly.

Suggested Citation

  • Charles T. Carlstrom & Saeed Zaman, 2014. "Using an Improved Taylor Rule to Predict When Policy Changes Will Occur," Economic Commentary, Federal Reserve Bank of Cleveland, issue March.
    • Handle: RePEc:fip:fedcec:00005
    DOI: 10.26509/frbc-ec-201402
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    Cited by:

    1. Yilmazkuday, Hakan, 2021. "The Great Trade Collapse: An Evaluation Of Competing Stories," Macroeconomic Dynamics, Cambridge University Press, vol. 25(4), pages 1053-1089, June.
    2. Torsten Schmidt & Roland Döhrn & Philipp Jäger & Philipp an de Meulen & Daniela Grozea-Helmenstein & Svetlana Rujin & Lina Zwick, 2014. "Die wirtschaftliche Entwicklung im Ausland: Moderate Expansion der Weltwirtschaft," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 34, 09.
    3. Schmidt, Torsten & Döhrn, Roland & Jäger, Philipp & an de Meulen, Philipp & Grozea-Helmenstein, Daniela & Rujin, Svetlana & Zwick, Lina, 2014. "Die wirtschaftliche Entwicklung im Ausland: Moderate Expansion der Weltwirtschaft," RWI Konjunkturberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, vol. 65(3), pages 5-38.
    4. Mikhail V. Oet & Kalle Lyytinen, 2017. "Does Financial Stability Matter to the Fed in Setting US Monetary Policy?," Review of Finance, European Finance Association, vol. 21(1), pages 389-432.

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