Appended Note 1-5 Taylor Rule Estimates
- Japanese version
- English version
A Taylor Rule is calculated by the following two methods.
(1) Estimation based on the least square method
Although the Central Bank decides on a policy rate based on its predictions about the current GDP gap and inflation rate, assume that the interest rate is gradually moving closer to the target interest rate.
The above formula was calculated by OLS. The results are as follows.
Data from Q1 1980-Q4 1998 was used.
The numbers in parentheses are t values. HAC standard deviation was used.
The target interest rate was calculated from the following formulas.
(2) Estimation based on the instrumental variable method
Although the Central Bank decides on a policy rate based on its predictions about the future GDP gap and inflation rate, assume that the interest rate is gradually moving closer to the target interest rate.
Substitute the expected rate with the actual rate.
et indicates total prediction errors. It can be thought that no correlation exists between the information from before period t and a prediction error as past information was used when predictions were drawn up. The above formula is then calculated by an instrumental variable method using values from Q1 through Q4 of each explanatory variable as instrumental variables. The results are as follows.
Data from Q1 1980-Q4 1998 was used.
The numbers in parentheses are t values. HAC standard deviation was used.
The formula below is for calculating a target interest rate given that the Central Bank accurately predicts the future.
