Monetary policy rules based on real-time data

By Athanasios Orphanides. 2001

1,526 citations recorded by the source corpus.

In recent years, simple policy rules have received attention as a means to a more transparent and effective monetary policy. Often, however, the analysis is based on unrealistic assumptions about the timeliness of data availability. This permits rule specifications that are not operational and ignore difficulties associated with data revisions. This paper examines the magnitude of these informational problems using Taylor's rule as an example. I demonstrate that the real-time policy recommendations differ considerably from those obtained with the ex post revised data and are revised substantially even a year after the relevant quarter. Further, I show that estimated policy reaction functions obtained using the ex post revised data can yield misleading descriptions of historical policy. Using Federal Reserve staff forecasts I show that in the 1987-1992 period simple forward-looking specifications describe policy better than comparable Taylor-type specifications, a fact that is largely obscured when the analysis is based on the ex post revised data.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2d74fcfa6de7193c87c4fd10031c8a0b464cb90f

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Citations in the corpus

The Role of Labor Markets for Euro Area Monetary Policy (2009, neutral): “18 The estimates Petrongolo and Pissarides (2001) summarize show more variability than suggested by this range, and several papers estimate a lower value of ξ.”
The policy preferences of the US Federal Reserve (2004, neutral): “( 24 ) show, the policy rule in the benchmark model contains a very weak response to”
Using Taylor Rules to Understand European Central Bank Monetary Policy (2007, methodology): “A general critique to estimated policy rules such as (2) and (3) has been proposed in a sequence of articles by Orphanides (2001a, 2001b, 2002).”
The relevance of real-time data in estimating reaction functions for the Euro area (2005, background): “6 Against this general background, in this paper we are interested in addressing the issue of using real-time versus ex-post revised data along the lines of the work by Orphanides (2001).”
Taylor Rules with Real-Time Data: A Tale of Two Countries and One Exchange Rate (2008, methodology): “While it is clear that the Orphanides (2003) and Greenbook data were not available to market participants in real time, the picture is cloudier with the Bundesbank potential output data.”
Macroeconomic Uncertainty Through the Lens of Professional Forecasters (2019, positive): “The algorithm is iterated a total of 80, 000 times, discarding the first 30, 000 draws of parameters. We collect 5, 000 draws by storing every 10th draw in order to avoid potential autocorrelation across draws. Hence, the MCMC algorithm proposed for the new model with different starting dates builds”
Anchored Inflation Expectations (2020, neutral): “These include various approaches in the adaptive learning literature, such as models of escape dynamics [Cho, Williams, and Sargent (2002)], models of constant gain learning [Branch and Evans (2019)], models of predictor selection [Hommes and Lustenhouwer (2015)], models with state-dependent gains [”
Macroeconomic Forecasting With Mixed-Frequency Data (2008, methodology): “…out-of-sample forecasting exercises based on final-revised data may exaggerate the predictive power of explanatory variables relative to what actually could have been achieved at the time (Diebold and Rudebusch 1991; Orphanides 2001; Orphanides and van Norden 2005; Faust, Rogers, and Wright 2003).”
Monetary Policy in a Monetary Union: What Role for Regional Information? (2008, background): “A necessarily incomplete list of recent contributions dealing with these themes includes Peersman and Smets (1999), Taylor (1999a, 1999b), Orphanides (2001) , Rudebusch (2001, 2002), Levin, Wieland, and Williams (2003), and Lubik and Schorfheide (2007).”
Using Taylor Rules to Understand ECB Monetary Policy (2003, methodology): “A general critique to estimated policy rules such as (2) and (3) has been proposed in a sequence of articles by Orphanides (2001a, 2001b, 2002).”
Historical monetary policy analysis and the Taylor rule (2003, methodology): “For this, extending forward the data presented in Orphanides (2001, 2003) I created a dataset with first announced measures of output data and real-time estimates of potential output, as would be available to the FOMC at the time of the FOMC meetings by the middle month of any quarter.”
Interest Rate Setting by the ECB, 1999-2006: Words and Deeds (2012, background): “Orphanides (2001) shows that estimates of empirical reaction functions for the Federal Reserve that rely on output gaps are highly sensitive to the choice of ex post or real-time data.”
Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japan (2000, positive): “Federal Reserve Bank of RichmondEconomic Quarterly Volume 86/1 Winter 2000 49 consider alternative instrument or target variables,4 and very recently some criticisms of the Taylor rule have been expressed by Orphanides (1998, 1999), Meltzer (1999), and others.”