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Choosing a Taylor Rule with Limited Data Availability: The Benchmark Approach

Author

Listed:
  • Anton Grui

    (National Bank of Ukraine)

  • Jeffrey Liebman

    (Lehigh College of Business)

  • Sergiy Nikolaychuk

    (National Bank of Ukraine)

  • Alex Nikolsko-Rzhevskyy

    (Lehigh College of Business)

Abstract

In this paper, authors propose and test a new methodology that aims to select the best performing monetary policy rule when macroeconomic data are very limited, as is often the case for developing countries. The methodology is based on calculating economic losses during the periods when a country implicitly followed an assumed rule and when its central bank exercised discretion. For countries with short data spans where such analysis is not possible, authors propose adopting the rules that historically worked well for their peers. As an intermediate step, authors develop a novel approach to the calculation of the equilibrium real interest rate for developing countries that accounts for their substantial risk premia and the expected real appreciation of the domestic currency. The methodology is then applied to Czechia, Hungary, Poland, and Ukraine to construct the optimal policy rate path and contrast it with the actual one.

Suggested Citation

  • Anton Grui & Jeffrey Liebman & Sergiy Nikolaychuk & Alex Nikolsko-Rzhevskyy, 2022. "Choosing a Taylor Rule with Limited Data Availability: The Benchmark Approach," Working Papers 03/2022, National Bank of Ukraine.
  • Handle: RePEc:ukb:wpaper:03/2022
    as

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    File URL: https://bank.gov.ua/admin_uploads/article/WP_2022-03_Grui_Liebman_Nikolaychuk_Nikolsko-Rzhevskyy_eng.pdf
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    References listed on IDEAS

    as
    1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    2. John B. Taylor, 2017. "Rules Versus Discretion: Assessing the Debate Over the Conduct of Monetary Policy," NBER Working Papers 24149, National Bureau of Economic Research, Inc.
    3. Janet L. Yellen, 2012. "Perspectives on Monetary Policy : a speech at the Boston Economic Club Dinner, Boston, Massachusetts, June 6, 2012," Speech 641, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Taylor rules; monetary policy; real-time data; discretion;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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