The Taylor rule in Australia, 1989-2014

Article


Elston, Frank and Pensiero, Domenico. 2016. "The Taylor rule in Australia, 1989-2014." Academy of Taiwan Business Management Review. 12 (1), pp. 12-19.
Article Title

The Taylor rule in Australia, 1989-2014

ERA Journal ID211566
40538
Article CategoryArticle
AuthorsElston, Frank (Author) and Pensiero, Domenico (Author)
Journal TitleAcademy of Taiwan Business Management Review
Academy of Taiwan Business Management Revie
Journal Citation12 (1), pp. 12-19
Number of Pages8
Year2016
PublisherTaiwan Institute of Business Administration
Place of PublicationTaiwan
ISSN1813-0534
Web Address (URL)http://www.jtiba.com
Abstract

The Taylor rule is a rules based monetary policy whereby the policy maker reacts to inflation and output gaps in setting the policy instrument, usually a short term interest rate. It can be prescriptive or descriptive. This study examines whether the Taylor rule describes the behaviour of the Reserve Bank of Australia since 1989, a period encompassing the last three Governors of the RBA. Using the traditional gap coefficients of .5 we find the implied Taylor cash rate, which then can be compared with the actual cash rate. The Taylor rule describes well the policymaking during the era of Governor Glenn Stevens, but does not describe as well the policymaking during the two predecessors. The study also determines the least squares estimates of the coefficients and finds that both the inflation and output coefficients exceed .5. A supplementary finding is that lagging the output and inflation gaps did not make any material difference.

KeywordsTaylor rule; monetary policy; inflation gap; output gap
ANZSRC Field of Research 2020380112. Macroeconomics (incl. monetary and fiscal theory)
Byline AffiliationsSchool of Commerce
Institution of OriginUniversity of Southern Queensland
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