For immediate release: July 24, 2007
Taylor Rule's Effectiveness Focus of Dallas Fed Publication
DALLAS—When using appropriate weights, the Taylor rule may diminish the overall level of uncertainty in the economy by enhancing the transparency of open market operations, according to the latest issue of the Federal Reserve Bank of Dallas' Economic Letter.
In "Measuring the Taylor Rule's Performance," Houston Branch economist Adrianna Z. Fernandez and University of Houston graduate student Alex Nikolsko-Rzhevskyy evaluate five variations on the original Taylor rule. They find that a 2004 model by Dallas Fed economist Evan F. Koenig is the most accurate in mirroring the behavior of the federal funds rate.
"Three data sets with little apparent relation to the federal funds rate, when combined with appropriate weights, have a remarkably good record tracking the Fed's policy decisions," Fernandez and Nikolsko-Rzhevskyy write.
The authors note that the Fed operates with wide discretion, and their findings shouldn't be considered an endorsement of rules to determine monetary policy.
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