Title

Are Taylor-Based Monetary Policy Rules Forward-Looking? An Investigation Using Supertoxogeneity Tests

Document Type

Article

Source

Applied Econometrics and International Development

Publication Date

2007

Volume

7

Issue

2

Abstract

Unlike previous studies which use statistical break tests to analyze the forwardlookingness of monetary policy rules, this study proposes the methodology that if the parameters of the Taylor rule change when the mechanism generating inflation changes, that is the Lucas critique applies, then inflation is not superexogenous for the parameters of the Taylor rule. In this case where superexogeneity fails, the rule is forward-looking. However, although the results indicate that the volatility of inflation (captured by a discrete heteroskedastic variance model of regime shifts) reduced by almost 50 percent, we fail to reject the null that inflation is superexogenous to the parameters of the Taylor rule. This implies that there is no evidence that Taylor-based monetary policy rules are forward-looking.

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