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Taylor Rules and liquidity in financial markets

Author

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  • Emanuele Franceschi

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

We study the parameter instability in the monetary policy rule followed by the US Federal Reserve Bank since WWII. We find evidence across a variety of econometric methods of fundamental instability, in particular on the parameter governing the reaction to inflation expectations-the Taylor Principle. We augment the monetary policy rule to account for liquidity conditions and find consistent violations of the Taylor Principle without sunspot inflation episodes. We study the presence of multiple regimes and find that when uncertainty and economic slowdown are looming the Fed reacts passively to expected inflation.

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  • Emanuele Franceschi, 2020. "Taylor Rules and liquidity in financial markets," Working Papers halshs-02978550, HAL.
    • Handle: RePEc:hal:wpaper:halshs-02978550
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-02978550
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    References listed on IDEAS

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    1. Blampied, Nicolas & Cafferata, Alessia & Tibiletti, Luisa & Uberti, Mariacristina, 2024. "Optimal Monetary Policy and Taylor Rule Extensions," MPRA Paper 119923, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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