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%.
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Supplemental Material
The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/snde-2016-0082).
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Articles in the same Issue
- Introduction: Special Issue Honoring the Contributions of Walter Enders
- Improving likelihood-ratio-based confidence intervals for threshold parameters in finite samples
- Nonlinear Taylor rules: evidence from a large dataset
- Flexible Fourier form for volatility breaks
- Nonlinear evidence on the existence of jobless recoveries
- Public debt and economic growth conundrum: nonlinearity and inter-temporal relationship
- Examining the success of the central banks in inflation targeting countries: the dynamics of the inflation gap and institutional characteristics
- Evaluating the impact of the labor market conditions index on labor market forecasts
- Time-varying correlations and Sharpe ratios during quantitative easing
- Testing for a unit root against ESTAR stationarity
Articles in the same Issue
- Introduction: Special Issue Honoring the Contributions of Walter Enders
- Improving likelihood-ratio-based confidence intervals for threshold parameters in finite samples
- Nonlinear Taylor rules: evidence from a large dataset
- Flexible Fourier form for volatility breaks
- Nonlinear evidence on the existence of jobless recoveries
- Public debt and economic growth conundrum: nonlinearity and inter-temporal relationship
- Examining the success of the central banks in inflation targeting countries: the dynamics of the inflation gap and institutional characteristics
- Evaluating the impact of the labor market conditions index on labor market forecasts
- Time-varying correlations and Sharpe ratios during quantitative easing
- Testing for a unit root against ESTAR stationarity