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SUMMARY:Does it Matter to Assume that U.S. Monetary Authorities Follow a T
aylor Rule? Paul Beaudry (Bank of Canada)\, Franck Portier (UCL) and Andy
Preston (UCL). - Franck Portier (University College London)
DTSTART;VALUE=DATE-TIME:20220222T131500Z
DTEND;VALUE=DATE-TIME:20220222T143000Z
UID:https://talks.ox.ac.uk/talks/id/fc0b87c0-4574-4192-958b-15f7b51479fa/
DESCRIPTION:The specification of the monetary policy rule is not a margina
l element in New Keynesian models\, but crucially determine allocations pr
operties. We show that assuming that monetary authorities follow a Taylor
rule does seriously bias estimation of New Keynesian type models. \nWe mak
e the distinction between feedback rules and state dependant rules. Feedba
ck rules relate the policy instrument to some endogenous variables of the
model. The Taylor rule is a feedback rule. State dependant rules relate th
e policy instrument to the state of the economy. \nUsing a simple abstract
models\, we illustrate three results. First\, and quite obviously\, a sta
te dependant rule can always replicate allocations generated by a feedback
rule model. In that sense\, it is not constraining to assume that policy
makers follow a state dependant rule or in other words\, a state dependent
rule is never misspecified. Second\, a feedback rule cannot always replic
ate allocations generated by a state dependant rule model\, because the fo
rmer rule is constrained to guarantee determinacy. Therefore\, a feedback
rule should be used only if one believe that the actual policy maker is i
ndeed constrained to such a rule. Third\, even when the estimation is not
constrained by determinacy\, assuming wrongly that the policy is a feedbac
k rule leads to biases in the estimation.\nWe therefore identify two sourc
es of bias. The model coefficients will be biased if the true policy rule
is misspecified. We refer to this as the misspecification bias. Imposing d
eterminacy of the model solution in the estimation restricts the parameter
space in a way that is dependant on the specific rule assumed. We refer t
o this as the determinacy bias. \nWe estimate a simple New Keynesian model
and show that we face a determinacy bias. We study some extensions of tha
t model (including a HANK one) and show that the determinacy bias is perva
sive. Finally we estimate the Smets-Wouters model and show that there is n
o determinacy bias\, but a strong misspecification bias. \nSpeakers:\nFran
ck Portier (University College London)
LOCATION:Seminar Room A or https://zoom.us/j/93987778529
TZID:Europe/London
URL:https://talks.ox.ac.uk/talks/id/fc0b87c0-4574-4192-958b-15f7b51479fa/
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DESCRIPTION:Talk:Does it Matter to Assume that U.S. Monetary Authorities F
ollow a Taylor Rule? Paul Beaudry (Bank of Canada)\, Franck Portier (UCL)
and Andy Preston (UCL). - Franck Portier (University College London)
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