Arbeitspapier
Taylor rule estimation by OLS
Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as in ation and the output gap, which are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term, and hence, an asymptotic bias. In principle, Instrumental Variables (IV) estimation can solve this endogeneity problem. In practice, IV estimation poses challenges, as the validity of potential instruments depends on various unobserved features of the economic environment. We argue in favor of OLS estimation of monetary policy rules. To that end, we show analytically in the three-equation New Keynesian model that the asymptotic OLS bias is proportional to the fraction of the variance of regressors accounted for by monetary policy shocks. Using Monte Carlo simulation, we then show that this relationship also holds in a quantitative model of the U.S. economy. As monetary policy shocks explain only a small fraction of the variance of regressors typically included in monetary policy rules, the endogeneity bias is small. Using simulations, we show that, for realistic sample sizes, the OLS estimator of monetary policy parameters outperforms IV estimators.
- Sprache
-
Englisch
- Erschienen in
-
Series: Texto para discussão ; No. 686
- Klassifikation
-
Wirtschaft
Monetary Policy
Central Banks and Their Policies
Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Money and Interest Rates: Forecasting and Simulation: Models and Applications
- Thema
-
Taylor rule
OLS
GMM
endogeneity bias
weak instruments
New Keynesian models
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Viana de Carvalho, Carlos
Eusepi, Stefano
Mönch, Emanuel
Preston, Bruce
- Ereignis
-
Veröffentlichung
- (wer)
-
Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia
- (wo)
-
Rio de Janeiro
- (wann)
-
2021
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:43 MEZ
Datenpartner
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.
Objekttyp
- Arbeitspapier
Beteiligte
- Viana de Carvalho, Carlos
- Eusepi, Stefano
- Mönch, Emanuel
- Preston, Bruce
- Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia
Entstanden
- 2021
Ähnliche Objekte (12)
Tinbergen rules the Taylor Rule
OLS estimation of the intra-household distribution of consumption
OLS estimation of the intra-household distribution of expenditure
Cointegrating polynomial regressions: Fully modified OLS estimation and inference
OLS estimation of the intra-household distribution of expenditure
Alternative Estimation Methodologies for Macro Model: ECM vs. OLS
The perils of Taylor Rules
Asset Prices in Taylor Rules: Specification, Estimation, and Policy Implications for the ECB
Making a Weak Instrument Set Stronger: Factor-Based Estimation of the Taylor Rule
OLS-based estimation of the disturbance variance under spatial autocorrelation
The Taylor Rule: A Spurious Regression?
Liquidity Traps with Global Taylor Rules
Tinbergen rules the Taylor Rule
OLS estimation of the intra-household distribution of consumption
OLS estimation of the intra-household distribution of expenditure
Cointegrating polynomial regressions: Fully modified OLS estimation and inference
OLS estimation of the intra-household distribution of expenditure
Alternative Estimation Methodologies for Macro Model: ECM vs. OLS
The perils of Taylor Rules
Asset Prices in Taylor Rules: Specification, Estimation, and Policy Implications for the ECB
Making a Weak Instrument Set Stronger: Factor-Based Estimation of the Taylor Rule
OLS-based estimation of the disturbance variance under spatial autocorrelation
The Taylor Rule: A Spurious Regression?
Liquidity Traps with Global Taylor Rules
Tinbergen rules the Taylor Rule
OLS estimation of the intra-household distribution of consumption
OLS estimation of the intra-household distribution of expenditure
Cointegrating polynomial regressions: Fully modified OLS estimation and inference
OLS estimation of the intra-household distribution of expenditure
Alternative Estimation Methodologies for Macro Model: ECM vs. OLS
The perils of Taylor Rules
Asset Prices in Taylor Rules: Specification, Estimation, and Policy Implications for the ECB
Making a Weak Instrument Set Stronger: Factor-Based Estimation of the Taylor Rule
OLS-based estimation of the disturbance variance under spatial autocorrelation
The Taylor Rule: A Spurious Regression?