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The Taylor rule and interest rate uncertainty in the U.S. 1970-2006

By Martin Mandler

Abstract

This paper shows how to estimate forecast uncertainty about future short-term interest rates by combining a time-varying Taylor rule with an unobserved components model of economic fundamentals. Using this model I separate interest rate uncertainty into economically meaningful components that represent uncertainty about future economic conditions and uncertainty about future monetary policy. Results from estimating the model on U.S. data suggest important changes in uncertainty about future short-term interest rates over time and highlight the relative importance of the different elements which underlie interest rate uncertainty for the U.S.

Topics: C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models, C53 - Forecasting and Prediction Methods; Simulation Methods, E58 - Central Banks and Their Policies
Year: 2007
OAI identifier: oai:mpra.ub.uni-muenchen.de:18770

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