In this article, we consider two new independent variables as inputs to the Taylor Rule. These are the equity and housing momentum variables and are introduced to investigate the potential usefulness of these two variables in guiding the Fed to lean against potential bubbles. Such effectiveness cannot adequately be evaluated if the Taylor Rule estimation follows the standard regression methodology that has been criticized in the literature to be econometrically incorrect. Using a time-varying parameter estimation methodology, we find that equity momentum as an input in the Taylor Rule does not contribute to changes in Fed Funds. However, the housing momentum plays an important role econometrically and can be a useful tool in setting Fed Funds rates.
Malliaris, Anastasios G. and Bhar, Ramaprasad. Asset Price Momentum and Monetary Policy: Time-varying Parameter Estimation of Taylor Rules. Applied Economics, 48, 55: 5329-5339, 2016. Retrieved from Loyola eCommons, School of Business: Faculty Publications and Other Works, http://dx.doi.org/10.1080/00036846.2016.1176117
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.
© Taylor & Francis 2014