Interest rates,government purchases and the Taylor rule in recessions and expansions |
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Institution: | 1. National Institute of Economic and Social Research, 2, Dean Trench Street, London SW1P 3HE, United Kingdom;2. Queen Mary, University of London, Mile End Road, London E1 4NS, London;1. WZB, Reichpietschufer 50, 10785 Berlin, Germany;2. Department of Economics, Humboldt-Universität zu Berlin, Spandauer Str. 1, 10178 Berlin, Germany;3. Department of Economics, University of Mannheim, L7 3-5, 68131 Mannheim, Germany |
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Abstract: | In this paper we study asymmetries in the Taylor rule for the United States during the 1970–2012 period. We show that monetary authorities have been constantly concerned with excess demand in overheated periods – when the output gap is positive or the unemployment rate falls below 7% or 7.5% – raising the interest rate aggressively in that case. However, the Fed seems more reluctant to decrease the fund’s rate during recessions. On the contrary, monetary authorities react symmetrically and forcefully to inflation in booms and busts. Finally, we provide evidence that an expansionary fiscal policy does not lead to an increase in interest rates, and thus there is not necessary a “crowding-out” effect in recessions. |
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Keywords: | Monetary policy Asymmetries Recessions Expansions Output gap |
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