Understanding the Deviations of the Taylor Rule: A New Methodology with an Application to Australia

Kerry B. Hudson and Joaquin Vespignani

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia’s deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world’s largest economy.

Keywords: Taylor Rule; Monetary Policy; Small Open Economy (search for similar items in EconPapers)
JEL-codes: E40 E50 E52 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Understanding the deviations of the Taylor Rule: a new methodology with an application to Australia (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2014-78

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