Timing in the Taylor Rule

[jens81]

In many papers, the Taylor rule is described in this form: R(t)=f(Pi(t),Y(t),M(t),...), which however does not say anything about when the variables are determined. I just read Dynare code ( http://www2.bc.edu/~iacoviel/research_f ... lo_aer.mod ) where

"Rhat = (1-rR)*(1+rpi)*pihat(-1)+rY*(1-rR)*Yhat(-1)+rR*Rhat(-1)+eRhat;"

is used. Recently, I read Dynare code in this forum (which however did not yield correct results) with a Taylor rule that sets interest rates based on contemporenous Inflation and output.

What is correct ?

[AssiaEzzeroug]

Hi,

Actually, the Taylor principle is usually considered as a determinacy condition to stabilize inflation and output gap. It states in particular that the coefficient associated with inflation must be greater than unity.
A simple rule depending essentially on contemporaneous variables is correct but can lead indeed to bad results.

Best

[jens81]

Hi,
thanks for your answer, but I am not getting it.
Is specification the above linked paper correct or do I need to input variables from period t?

[SébastienVillemot]

There is no such thing as THE correct specification of the Taylor rule, there are just several specifications in the litterature, all of them valid.

Some of them are forward-looking (i.e. inflation and output gap in the future), others use contemporaneous values of these, still others use lagged values. And depending on the coefficients, you will get a stable model or not.

Some papers even investigate which is the best specification of the rule among these.