An Econometric Reflection on Interest Rate Rule and the Form Selection of Taylor Rule
Discussing the basic form of"Taylor Rule"has been a classic topic in monetary economics.This paper first illustrates the shortcomings of the Taylor Rule with Clarida's form,then selects China's real Taylor Rule based on the principles of econometric evaluation.The main conclusions are as follows:Firstly,the Taylor Rule with Clarida's form,which leads to overfitting,pseudo smoothing,estimating bias,and hypothesis testing failure,is not a true reflection of the central bank's policy intention.Secondly,China's real interest rate rule is closer to the classic Taylor Rule,in which DR007,the CPI excluding food price and B-K(6-32)-type filter are the optimal proxy indicators of nominal interest rate,inflation,and output gap respectively.Thirdly,as the central bank shows a strong preference for avoiding inflation as well as economic contraction,China's real Taylor Rule should include the quadratic terms of inflation deviation and the output gap.In addition,this paper also puts forward a new framework of macro research,that is econometric evaluation,which aims at making a comprehensive evaluation in terms of concept,theory,data,reality,prediction,etc.,so that reflects stylized facts more accurately and provides guidance for more accurate selection of methodologies in subsequent studies.
Taylor RuleOutput GapInflationEconometric Evaluation
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