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Has U.S. Monetary Policy Tracked the Efficient Interest Rate?

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Abstract
Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of the monetary policy reaction function, in which the interest rate tracks the evolution of a Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This surprising result holds for a wide variety of specifications of the other ingredients of the policy rule and of approaches to the measurement of the output gap. Moreover, it is robust across two different models of private agents? behavior.

Suggested Citation

  • Vasco Curdia & Andrea Ferrero & Ging Cee Ng & Andrea Tambalotti, 2014. "Has U.S. Monetary Policy Tracked the Efficient Interest Rate?," Working Paper Series 2014-12, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2014-12
    DOI: 10.24148/wp2014-12
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    More about this item

    Keywords

    U.S. monetary policy; interest rate rules; DSGE models; Bayesian model comparison;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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