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Title: Estimating federal funds rates: A regime-mixture approach Authors:  Herman van Dijk - Erasmus University Rotterdam (Netherlands) [presenting]
Abstract: Research on the Taylor rule using post-WWII data tends to exogenously partition the data based on either pre-Volcker and Volcker, Greenspan periods. A finer partition is based on the terms of the chair of the Board of Governors of the Federal Reserve System. We contribute to modelling Taylor Rule fundamentals by proposing a novel dynamic mixture model that endogenises structural changes in Taylor Rule fundamentals in real time. Bayes's estimates of regime indicators suggest that the Fed's response to variations in inflation and output gap switches in different phases of the business cycle. In particular, Fed behaviour is usually consistent with the Taylor principles during normal times, but then switching to output targeting during early phases of recessions. Our results also suggest that splitting post-WWII macroeconomic data into sub-samples based on the Fed chair may generate misleading results.