<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>The Taylor (1993) rule for determining interest rates is generalized to account for three additional variables: The money supply, money velocity, and the unemployment rate. Thus, five parameters, i.e. weights assigned to the deviation in the inflation rate, the deviation in real GDP (Gross Domestic Product), the deviation in money supply, the deviation in the money velocity, and the deviation in unemployment rate, are introduced and estimated. The article explores and tests various combinations of the Taylor rule, the Quantity Equation (Friedman, 1970), and the Phillips (1958) curve. The monthly US January 1, 1959 to March 31, 2022 data are adopted to test the optimal parameter values. Estimating the parameters with the least squares method gives better results than the Taylor rule. The optimal parameter values involve a relatively high weight to the deviation in unemployment rate, and moderate weights are assigned to the deviation in the inflation rate, the deviation in real GDP, the deviation in money supply, and the deviation in the money velocity. The corresponding sum of squares decreases by 42.95% when compared with the Taylor rule.</p>
</abstract>

The Taylor (1993) rule for determining interest rates is generalized to account for three additional variables: The money supply, money velocity, and the unemployment rate. Thus, five parameters, i.e. weights assigned to the deviation in the inflation rate, the deviation in real GDP (Gross Domestic Product), the deviation in money supply, the deviation in the money velocity, and the deviation in unemployment rate, are introduced and estimated. The article explores and tests various combinations of the Taylor rule, the Quantity Equation (Friedman, 1970), and the Phillips (1958) curve. The monthly US January 1, 1959 to March 31, 2022 data are adopted to test the optimal parameter values. Estimating the parameters with the least squares method gives better results than the Taylor rule. The optimal parameter values involve a relatively high weight to the deviation in unemployment rate, and moderate weights are assigned to the deviation in the inflation rate, the deviation in real GDP, the deviation in money supply, and the deviation in the money velocity. The corresponding sum of squares decreases by 42.95% when compared with the Taylor rule.

Modeling which Factors Impact Interest Rates

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution 4.0 International License.

{"article-title":"Modeling which Factors Impact Interest Rates"}

The Taylor (1993) rule for determining interest rates is generalized to account for three additional variables: The money supply, money velocity, and the...

Modeling which Factors Impact Interest Rates

Published Online: May 24, 2023

Page range: 211 - 237

Received: Oct 09, 2022

Accepted: Nov 21, 2022

DOI: https://doi.org/10.2478/jcbtp-2023-0020

Keywords
Monetary policy, Taylor rule, Quantity Equation, Phillips curve, interest rates, inflation rate, GDP, money supply, money velocity, unemployment rate

© 2023 Guizhou Wang et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Modeling which Factors Impact Interest Rates

Published Online: May 24, 2023

Page range: 211 - 237

Received: Oct 09, 2022

Accepted: Nov 21, 2022

DOI: https://doi.org/10.2478/jcbtp-2023-0020

KeywordsMonetary policy, Taylor rule, Quantity Equation, Phillips curve, interest rates, inflation rate, GDP, money supply, money velocity, unemployment rate

© 2023 Guizhou Wang et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Keywords
Monetary policy, Taylor rule, Quantity Equation, Phillips curve, interest rates, inflation rate, GDP, money supply, money velocity, unemployment rate