DYNAMIC TAYLOR RULES AND THE PREDICTABILITY OF INTEREST RATES

Recent research shows that when commonly estimated dynamic Taylor rules, which are augmented with a lagged interest, are embedded in a variety of macroeconomic models, they imply a greater amount of predictable information about future movements in interest rates than is actually evident in the yield curve. We extend the analysis to consider more generally the predictability of the arguments of the Taylor rule inflation and the output gap in addition to the interest rate. Specifically, we compare the predictability of these three variables in a macroeconomic model with a dynamic Taylor rule to their predictability in real-time surveys of macroeconomic forecasters or a VAR model. We find that the strongest evidence against the dynamic Taylor rule is that while it is easy to predict the variables that enter the rule, it is very hard to predict actual interest rate changes. This disparity suggests that dynamic Taylor rules neglect important aspects of monetary policy behavior.

Derivation and Estimation of a New Keynesian Phillips Curve in a Small Open Economy

In recent years, it has become increasingly common to estimate New Keynesian Phillips curves with a measure of firms' real marginal cost as the real driving variable. It has been argued that this measure is both theoretically and empirically superior to the traditional output gap. In this paper, a marginal-cost based New Keynesian Phillips curve is estimated on Swedish data by means of GMM and Full Information Maximum Likelihood. The results show that with real marginal cost in the structural equation the point estimates generally have the exptected positive sign, which is less frequently the case using the output gap in the Phillips curve equation. This suggests that real marginal cost might be a more adequate real explanatory variable for Swedish inflation than the output gap. However, standard errors in the estimations are large and it is in fact difficult to pin down a statistically significant relationship between either real marginal cost or the output gap and inflation