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The Taylor rule: can it be supported by the data?

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  • Leon, Costas

Abstract

The Taylor equation is a simple monetary policy rule that determines the Central Bank’s policy rate as a function of inflation and output. A significant body of literature verifies the consistency of the Taylor rule with the data. However, recently there has been a growing literature regarding the validity of the estimated parameters due to the non-stationarity of the interest rate. In this paper I test the consistency of the Taylor rule with the Greek data for the period 1996-2004. It appears that the data do not support the Taylor rule in the sense that they do not form a cointegration set of variables. Therefore, the estimated parameters should be considered fragile and the forecasting for the interest rate as a function of inflation and output should not be expected to be adequately consistent with the actual data.

Suggested Citation

  • Leon, Costas, 2006. "The Taylor rule: can it be supported by the data?," MPRA Paper 1650, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1650
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    References listed on IDEAS

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    More about this item

    Keywords

    Taylor rule; Monetary policy; Central bank; EMU; Greece;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • 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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