Title: Bernanke vs Taylor: US monetary policy rules with non-Gaussian marginal distributions
Authors: Shaun Vahey - Warwick University (United Kingdom)
Liz Wakerly - Warwick University (United Kingdom)
Ozer Karagedikli - Reserve Bank of New Zealand (New Zealand) [presenting]
Abstract: Although John Taylor has argued that his policy rule provides a useful a benchmark for monetary policy, Ben Bernanke and others have deployed many variants of the Taylor rule. Using Taylor's preferred specification, U.S. monetary policy was too loose 2003 to 2005, contributing to the build up to the Great Recession. In contrast, given Bernanke's ``best'' model, nominal interest rates through the same period look about right. The aim is to re-examine the path of nominal interest rates through the Great Recession and the aftermath, reformulating the Taylor rule to accommodate the non-Gaussian marginal distribution of nominal interest rates. Assuming linear dependence between the macroeconomic variables of interest, we find strong evidence to support Bernanke's account of monetary policy leading up to the recession.