Understanding the deviation of Australian policy rate from the Taylor rule

Kerry B Hudson, Joaquin Vespignani

    Research output: Contribution to journalArticle

    Abstract

    This investigation aims to explain and quantify the deviations of the Australian policy rate (set by Reserve Bank of Australia) from the Taylor Rule. A 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 policy rate 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.
    Original languageEnglish
    Pages (from-to)973-989pp
    JournalApplied Economics
    Volume50
    Issue number9
    DOIs
    Publication statusPublished - 2018

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