Monetary Policy Rules Based on Real-Time Data (1997)
| Venue: | BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FINANCE AND ECONOMICS DISCUSSION PAPER SERIES |
| Citations: | 140 - 14 self |
BibTeX
@INPROCEEDINGS{Orphanides97monetarypolicy,
author = {Athanasios Orphanides},
title = {Monetary Policy Rules Based on Real-Time Data},
booktitle = {BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FINANCE AND ECONOMICS DISCUSSION PAPER SERIES},
year = {1997},
publisher = {}
}
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Abstract
In recent years, simple policy rules have received attention as a means to a more transparent and effective monetary policy. Often, however, the analysis is based on unrealistic assumptions about the timeliness of data availability. This permits rule specifications that are not operational and ignore difficulties associated with data revisions. This paper examines the magnitude of these informational problems using Taylor's rule as an example. First, I construct a database of current quarter estimates/forecasts of the quantities required by the rule based only on information available in real time. Using this data I reconstruct the policy recommendations which would have been obtained in real time. I demonstrate that the real-time policy recommendations differ considerably from those obtained with the ex post revised data. Within-year revisions in the policy recommendations are also quite large with a standard deviation exceeding that of the quarterly change of the federal funds rate. Further, I show that estimated policy reaction functions obtained using the ex post revised data can yield misleading descriptions of historical policy. Using Federal Reserve sta forecasts I show that in the 1987-1992 period simple forward-looking specifications describe policy better than comparable Taylor-type specifications, a fact that is largely obscured when the analysis is based on the ex post revised data.
