Adam Smith Business School

Professor Herman van Dijk, Erasmus University

"Taylor Rules with Endogenous Regimes"
Thursday, 31 August. 4 pm
Room 355, Main Building

Abstract

The Fed's monetary policy rule switches during the different phases of the business cycle. This finding is established using a novel dynamic mixture model to estimate regime-dependent Taylor-type monetary policy rules on US quarterly real-time data from 1960 to 2020. Instead of exogenously partitioning the data based on the tenures of the Fed chairs, we introduce a Bayesian framework using a simple and efficient MCMC algorithm that endogenously selects the timing and the number of regimes in a data-driven way. Our agnostic approach favours a partitioning of the data based on two regimes related to the phases of the business cycle. The estimated policy rule coefficients differ in two important ways for the two regimes. First, the degree of interest rate smoothing associated with a monetary policy of gradualism is substantially higher during normal times than in recessionary periods. Second, the estimate of the inflation coefficient is rather similar across regimes and largely satisfies the Taylor principle in both regimes, but the output gap coefficient is higher in the recessionary regime. We find large errors in non-systematic monetary policy during the energy crisis of the late 1970s early 1980s, suggesting that these policy mistakes contributed to the stagflation within this period. The use of Greenbook forecast data, prepared by the Federal Reserve, indicates qualitative similar but stronger empirical results.

Bio

Herman K. van Dijk is a Consultant at the Research Section of the Norwegian Central Bank (Norges Bank) and professor emeritus at the Econometric Institute, Erasmus University Rotterdam. He was director of the Tinbergen Institute, Director of the Econometric Institute, and professor of Econometrics with a Personal Chair at Erasmus University Rotterdam. He has been a visiting Fellow and a visiting professor at the University of Cambridge, the Catholic University of Louvain, Harvard University, Duke University, Cornell University, European University in Florence, the University of New South Wales, and VU University Amsterdam. He is a Fellow of the Journal of Econometrics, the International Society of Bayesian Analysis, the International Association of Applied Econometrics, an Honorary Fellow of the Tinbergen Institute, an elected Member of the International Statistical Institute, a Senior Fellow at the Rimini Center for Economic Analysis, Distinguished Author of the Journal of Applied Econometrics, and Knight in the Order of Lion of the Netherlands.

He has extensive experience as a (co-)manager and coordinator of research initiatives and conferences. He is the co-founder of the EC2 meetings of European econometricians; cofounder of the European Seminar on Bayesian Econometrics (ESOBE), and cofounder of the The Econometric and Tinbergen Institute lectures, published by Princeton University Press.

He received the Savage Prize for his PhD dissertation and is listed in the Journal Econometric Theory in the Econometricians Hall of Fame amongst the top ten European econometricians. His research interests cover a range of topics in econometrics with a common theme: Simulation-based Bayesian Econometric Techniques for Inference, Forecasting and Decision analysis. He serves on the Editorial Board of major journals in econometrics. His publications consist of several books and more than 200 international scientific journal papers and reports.

 

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First published: 11 August 2023