Has U.S. Monetary Policy Tracked the Efficient Interest Rate?


Andrea Ferrero

Ging Cee Ng

Andrea Tambalotti

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2014-12 | May 1, 2014

Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of the monetary policy reaction function, in which the interest rate tracks the evolution of a Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This surprising result holds for a wide variety of specifications of the other ingredients of the policy rule and of approaches to the measurement of the output gap. Moreover, it is robust across two different models of private agents’ behavior.

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Article Citation

Ferrero, Andrea, Andrea Tambalotti, Ging Cee Ng, and Vasco Curdia. 2014. “Has U.S. Monetary Policy Tracked the Efficient Interest Rate?,” Federal Reserve Bank of San Francisco Working Paper 2014-12. Available at https://doi.org/10.24148/wp2014-12

About the Author
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Vasco Cúrdia is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Vasco Cúrdia