Abstract
This paper examines the Taylor rule in the context of United States monetary policy since 1965, particularly with respect to the zero-lower-bound era of the federal funds rate from 2009 to 2016. A nonlinear Taylor rule is developed which features smooth transitions in the first two moments of the federal funds rate. This flexible specification is found to usefully capture observed nonlinearity, while accounting for the well-documented structural changes in monetary policy formation at the Federal Reserve in the last 50 years, and especially in the recent zero-lower-bound era.
Funding source: Center for Research in Econometric Analysis of Time Series (CREATES)
Funding source: National Centre for Econometric Research (NCER)
Acknowledgement
Material from the paper has been presented at the 26th Annual Symposium of the Society for Nonlinear Dynamics and Econometrics, Keio University, Tokyo, March 2018, Computing in Economics and Finance (CEF 2018), Università Cattolica del Sacro Cuore, Milan, June 2018, and a seminar at Aarhus University. Comments from participants are gratefully acknowledged. Any errors and shortcomings in this work are the authors’ own responsibility.
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Author contribution: All the authors have accepted responsibility for the entire content of this submitted manuscript and approved submission.
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Research funding: This research was supported by the Center for Research in Econometric Analysis of Time Series (CREATES). Funding from the National Centre for Econometric Research, Queensland University of Technology, Brisbane, is also gratefully acknowledged.
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Conflict of interest statement: The authors declare no conflicts of interest regarding this article.
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