Our objective in this paper has been to provide more theoretically coherent microfoundations for monetary policy rules in response to Lucas’s (1976) critique of econometric policy evaluation and, more importantly, to show that the Taylor rule can be derived via Friedman’s k% money supply rule. A key di¤erence with respect to the traditional IS-LM framework, is that, the aggregate decision rules...

Exchange rates forecasting performance is tested by a model which incorporates endogenous monetary policy through a Taylor rule reaction function. Other usual monetary and equilibrium empirical exchange rate models are also evaluated for comparison purposes. Predictability is tested by comparing the models to a benchmark random-walk specification. We contribute to the recent literature in many ...

This paper is concerned with the saddle-path stability of monetary growth rules in a two-country two-sector dynamic stochastic general equilibrium model. Alongside standard features of emerging economies, such as a combination of producer and local currency pricing for exports, fiscal dominance and oil exports, this model also incorporates informal labour and production sectors and examines how...

Standard monetary policy analysis built upon the New Keynesian model suggests that an optimal monetary policy rule is one which minimizes a weighted sum of the variance of inflation and the variance of the output gap. As one might expect, the Taylor rule evaluates well under this criteria. Recent calls for nominal GDP targeting therefore must contend with Taylor rule as an alternative approach ...

Fujimoto et al. (2014) set up a model with financial frictions through search and matching between firms and banks in the loan market. They also show that optimal policy criteria in the model include terms of credit variables. In this paper, we calibrate the model of Fujimoto et al. (2014) for South Korea and investigate the simple and optimal monetary and macroprudential policy rules that incl...

Ten years of inflation targeting in New Zealand is used to test whether monetary policy conforms to the simple rules that have been recommended in the literature. While a Taylor rule with the standard parameters used in the US describes New Zealand monetary policy quite well, the Reserve Bank has focused more strongly on price stability, as required by its Policy Targets Agreements. Monetary po...

A goal of this paper is to make sense of the seemingly puzzling behavior of interest rates and inflation and the role of central banks in that behavior during and after the Great Recession, particularly in the United States. To this end, we construct a model in which government debt plays a key role in exchange, and can bear a liquidity premium. If asset market constraints bind, then there need...

There is a general belief that policymakers take into account credit channel conditions when deciding monetary policy. However, literature lacks evidence on the specific role of credit channel in monetary policymaking. This paper estimates an extended version of the Taylor rule by incorporating credit channel variables explicitly. In particular, net worth capital ratio, bankruptcy cost and defa...

We develop a continuous-time regime-switching model for the term structure of interest rates, in which the spot rate follows the Taylor rule, and government bonds at different maturities are priced by no-arbitrage. We allow the coefficients of the Taylor rule and the dynamics of inflation and output gap to be regime-dependent. We estimate the model using government bond yields and find that the...

In this paper, we study cost functions over a finite collection of random variables. For these types of models, a calculus of differentiation is developed that allows us to obtain a closed-form expression for derivatives where “differentiation” has to be understood in the weak sense. The technique for proving the results is new and establishes an interesting link between functional analysis and...