Nonlinear Taylor rules: evidence from a large dataset

Authors

Jun Ma, Northeastern University
Eric Olson, West Virginia University
Mark E. Wohar, University of Nebraska at Omaha

Document Type

Article

Publication Date

2018

Publication Title

Studies in Nonlinear Dynamics & Econometrics

Volume

22

Issue

1

Abstract

In this paper we estimate nonlinear Taylor rules over the 1986–2008 sample time period and augment the traditional Taylor rule by including principal components to better model Federal Reserve policy. Including principal components is useful in that they extract information about the overall economy from multiple economic indicators in a statistically optimal way. Additionally, given that uncertainty may influence Federal Reserve decisions, we incorporate an uncertainty index in the reaction function of the Federal Reserve. We find substantial evidence that the Federal Reserve responded to increases in macroeconomic uncertainty by cutting the Federal Funds rate over the sample period. We also find evidence that the Federal Reserve responded aggressively to increases in capacity utilization, especially when the inflation rate was above 2%.

Comments

©2018 Walter de Gruyter GmbH, Berlin/Boston.

https://doi.org/10.1515/snde-2016-0082

Recommended Citation

Ma, Jun; Olson, Eric; and Wohar, Mark E., "Nonlinear Taylor rules: evidence from a large dataset" (2018). Economics Faculty Publications. 73.
https://digitalcommons.unomaha.edu/econrealestatefacpub/73