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Understanding the deviations of the Taylor rule : a new methodology with an application to Australia

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Hudson, K and Vespignani, JL (2015) Understanding the deviations of the Taylor rule : a new methodology with an application to Australia. Discussion Paper. University of Tasmania. (Submitted)

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Abstract

This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel
three-step econometric procedure designed to reflect the data-rich environment in which
central banks operate is proposed using information for 229 macroeconomic series. This
procedure can be applied to data for any economy with inflation targeting monetary rule. Our
application with Australian data shows that approximately 65% of Australia‘s deviation from
the Taylor Rule can be explained systematically, with international factors and a domestic
factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from
the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the
US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an
international monetary policy trend set forth by the world‘s largest economy.

Item Type: Report (Discussion Paper)
Keywords: Taylor Rule, Monetary Policy, Small Open Economy
Publisher: University of Tasmania
Date Deposited: 15 Jan 2016 00:16
Last Modified: 15 Jan 2016 00:35
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