Fed up with the Rules? Empirical Testing of Taylor Rule Variations in American Monetary Policy

Abstract

This study empirically tests variation in the Taylor rule over forty years of U.S. monetary policy, recognizing the potential philosophical breakpoints between Fed chair-people. We test the standard rule alongside more inclusive alternatives, settling on a more intentional and complex version that more accurately models not only unemployment and inflation pressures but consumer sentiment and interest rate smoothing. We notice important deviations from even the most inclusive version of the Taylor Rule, deviations that correlate with changes in political philosophy and historic events.