Recent Articles

Read more about our latest published articles.

Review’s Archive

Corresponding Author:
Huong Nguyen, Department of Economics and Finance, University of Louisiana at Lafayette, LA - USA

Coauthors:
Deergha Raj Adhikari, Department of Economics and Finance, University of Louisiana at Lafayette, LA - USA

Testing the Transformed Taylor Rule

December 29, 2025
JEL classification: E52; E58
Keywords: Transformed Taylor Rule; Okun’s Law; The Fed; ARDL; Monetary Policy and Inflation

Abstract

The Taylor rule has become a popular debate topic in measuring the effectiveness of monetary policy to control inflation. This study contributes to the existing literature by developing a unique transformed Taylor rule model which combines the Taylor rule and Okun’s law equations to test its validity. Since our model variables are found to be integrated of different orders and in view of a small sample size, to ensure that the error terms out of the estimation do not suffer from heteroskedasticity and serial correlation problem, we apply the ARDL model using federal funds rate as dependent variable, and the inflation rate and the unemployment rate as independent variables, we confirm invalidity of the Taylor rule on U.S. data between 1990 to 2024. Test results indicate that the Federal Reserve does not follow the Taylor rule, instead using its discretion in conducting the nation’s monetary policy. Since the Taylor rule inaccurately measures the exogenous variables and fails to consider many relevant variables, ignoring it enables the Fed to prevent the economy from falling into a dangerous and unusual economic condition. Our findings suggest that the Fed should adjust its policies based on the financial market conditions, not the Taylor rule. This is especially true during the crisis, such as, Covid-19 pandemic.


Read the full article

Download the article in PDF format to read and print.


Bibliography

Adrian, T. and N. Liang (2018), “Monetary Policy, Financial Conditions, and Financial Stability”, International Journal of Central Banking, 14(1), 73-131.

Almounsor, A. (2015), “Monetary Policy in Saudi Arabia: A Taylor-Rule Analysis”, International Journal of Economics and Finance, 7(3), 144-152, 10.5539/ijef.v7n3p144.

Asso, P., G. Kahn and R. Leeson (2007), “The Taylor Rule and the Transformation of Monetary Policy”, The Federal Reserve Bank of Kansas City, Economic Research Department, RWP 07-11.

Avetisyan, S. (2024), “Beyond the Traditional Taylor Rule: Redefining Inflation Targeting”, Working Paper, http://dx.doi.org/10.2139/ssrn.4973054.

Aye, G. (2021), “Short and Long Run Asymmetric Effects of Monetary and Fiscal Policy Uncertainty on Economic Activity in the U.S.”, Economia Internazionale/International Economics, 74(1), 83-96.

Baumol, W. (2020), “The Transactions Demand for Cash: An Inventory Theoretic Approach”, Quarterly Journal of Economics, 66(4), 545-556, https://doi.org/10.2307/1882104.

Bernanke, B. (2004), “The Great Moderation”, Remarks by Governor Ben S. Bernanke at the meetings of the Eastern Economic Association, Washington, DC, February 20.

Bernanke, B. and F. Mishkin (1997), “Inflation Targeting: A New Framework for Monetary Policy?”, National Bureau of Economic Research Working Paper 5893, DOI: 10.1257/jep.11.2.97.

Boivin, J. (2006), “Has U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data”, Journal of Money, Credit, and Banking, 38(5), 1149-1173.

Byrne, J., D. Korobilis and P. Ribeiro, (2016), “Exchange Rate Predictability in a Changing World”, Journal of International Money and Finance, 62, 1-24, https://doi.org/10.1016/j.jimonfin.2015.12.001.

Cafferata, A., N. Blampied, L. Tibiletti and M. Uberti (2025), “Optimal Monetary Policy and Taylor Rule Extension”, Economia Internazionale/International Economics, 78(3), 361-374.

Caporale, G., Helmi, M., Çatik, A., Ali, F. and Akdeniz, C. (2018), “Monetary Policy Rules in Emerging Countries: Is there an Augmented Nonlinear Taylor Rule?”, Economic Modelling, 72, 306-319, https://doi.org/10.1016/j.econmod.2018.02.006.

Carvalho, C., F. Nechio and T. Tristão (2021), “Taylor Rule Estimation by OLS”, Journal of Monetary Economics, 124, 140-154, https://doi.org/10.1016/j.jmoneco.2021.10.010.

Castro, V. (2011), “Can Central Banks’ Monetary Policy Be Described by a Linear (Augmented) Taylor Rule or by a Nonlinear Rule?”, Journal of Financial Stability, 7(4), 228-246, https://doi.org/10.1016/j.jfs.2010.06.002.

Cochrane, J. (2011), “Determinacy and Identification with Taylor Rules”, Journal of Political Economy, 119(3), 565-615, https://doi.org/10.1086/660817.

Cogley, T., G. Primiceri and T. Sargent (2010), “Inflation-Gap Persistence in the US”, American Economic Journal: Macroeconomics, 2(1), 43-69, DOI: 10.1257/mac.2.1.43.

Feige, E. and K. Pearce (1997), “The Substitutability of Money and Near-Monies: A Survey of the Time-Series Evidence”, Journal of Economic Literature, 15(2), 439-469.

Gemayel, E., Jahan, S. and Peter, A. (2011), “What can Low-Income Countries Expect from Adopting Inflation Targeting?”, IMF Working Paper 11/276.

Gerlach, S. and G. Schnabei (2000), “The Taylor Rule and Interest Rates in the EMU Area”, Economic Letters, 67(2), 166-171, https://doi.org/10.1016/S0165-1765(99)00263-3.

Goncalves, C. and B. Guimaraes (2022), “The Rise of the Taylor Principle”, Working Paper, http://dx.doi.org/10.2139/ssrn.3981816.

Gorter, J., J. Jacobs and J. de Haan (2008), “Taylor Rules for the ECB using Expectations Data”, The Scandinavian Journal of Economics, 110(3), 473-488, https://doi.org/10.1111/j.1467-9442.2008.00547.x.

Guo, Y. and W. Ma (2016), “Time-Varying Coefficient Taylor Rule and Chinese Monetary Policy: Evidence from the Time-Varying Cointegration”, Journal of Economic Development, 41(4), 27-44.

Hansen, L. and T. Sargent (2007), “Robustness”, Princeton University Press.

Judd, J. and G. Rudebusch (1998), “Taylor’s Rule and the Fed, 1970-1997”, FRBSF Economic Review, 3, 3-16.

Kim, C-J. and C.R. Nelson (2006), “Estimation of a Forward-Looking Monetary Policy Rule: A Time-Varying Parameter Model Using Ex-Post Data”, Journal of Monetary Economics, 53(8), 1949-1966, https://doi.org/10.1016/j.jmoneco.2005.10.017.

Mazikana, A. (2023), “The Taylor Rule in Finance and Showing how the Monetary Conditions Index is used as a Guide for the Central Bank Policies”, Working Paper, http://dx.doi.org/10.2139/ssrn.4381026.

Mohseni, R., W. Zhang and J. Cao (2015), “Chaotic Behavior in Monetary System: Comparison among Different Types of Taylor Rule”, International Journal of Economics and Management Engineering, 9(8), 2783-2786, doi.org/10.5281/zenodo.1107858 .

Orphanides, A. (2003), “Historical Monetary Policy Analysis and the Taylor Rule”, Board of Governors of the Federal Reserve System, pp. 1-49.

Osterholm, P. (2005), “The Taylor Rule: A Spurious Regression?”, Bulletin of Economic Research, 57(3), 217-247, https://doi.org/10.1111/j.0307-3378.2005.01220.x.

Siegfried, J. (2010), “Better Living through Economics”, Harvard University Press.

Smets, F. and R. Wouters (2007), “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach”, American Economic Review, 97(3), 586-606, DOI: 10.1257/aer.97.3.586.

Sturm, J-E. and J. de Haan (2011), “Does Central Bank Communication Really Lead to Better Forecasts of Policy Decisions? New Evidence Based on a Taylor Rule Model for the ECB”, Review of World Economics, 147, 41-58, https://doi.org/10.1007/s10290-010-0076-4.

Svensson, L. (2000), “Open-Economy Inflation Target”, Journal of International Economics, 50(1), 155-183, https://doi.org/10.1016/S0022-1996(98)00078-6.

Williams, J. (2017), “Rethinking the Natural Rate of Interest: An International Perspective”, Federal Reserve Bank of San Francisco Economic Letter, 2017-27, pp 1-6.

Yellen, J.L. (2016), “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future”, at: “Designing Resilient Monetary Policy Frameworks for the Future”, a Symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.

Register your account

First-time users should click on “Register your account” and enter the requested information. Upon successful registration, you will receive an e-mail with instructions to verify your registration.

Submission Guidelines

Authors’ login

Use the assigned user ID and password to login. Please, do not register again. Usernames and passwords may be changed after.

Quick search by author:
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Back to the top

Institute for International Economics
of the Genoa Chamber of Commerce


Istituto di Economia Internazionale
Camera di Commercio di Genova
Via Garibaldi, 4 (III piano) - 16124 Genova (Italy)
www.ge.camcom.gov.it