Working Paper: CEPR ID: DP12553
Authors: Joo Madeira; Nuno Palma
Abstract: We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.
Keywords: interest rates; new keynesian models; sticky prices; dsge; business cycles; bayesian estimation
JEL Codes: E32; E37; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Interest rate deviations (E43) | Inflation (E31) |
| Interest rate deviations (E43) | Output (Y10) |
| Endogeneity of inflation and output (E31) | Interest rate deviations (E43) |
| Interest rate changes (E43) | Inflation (E31) |
| Interest rate changes (E43) | Output (Y10) |