Empirical Evidence on the Generalized Taylor Principle # 334
نویسندگان
چکیده
During fi nancial crises central banks usually decrease interest rates in order to reduce fi nancial uncertainty. This behavior increases infl ation risk. The trade-off between infl ation and uncertainty stabilization can be modeled by the generalized Taylor rule, which describes infl ation sensitivity as a function of fi nancial uncertainty instead of a constant parameter. Based on the GMM-estimation of the generalized approach I confi rm the suggested uncertainty-dependent infl ation sensitivity of the Fed. Prolonged deviations from the Taylor principle are not evident. This implies that the Fed does not deemphasize infl ation stabilization in favor of uncertainty stabilization – especially during the peak of the latest sub-prime crisis. JEL Classifi cation: E44, E58
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