Essays on Deviations of the Taylor Rule - a New Methodology with an Application to Australia Case Study

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The paper “ Deviations of the Taylor Rule - a New Methodology with an Application to Australia” is a   persuasive example of a case study on finance & accounting. The aim of the paper is to investigate the deviations of the Taylor Rule, with a specific focus being on the Australian context. The authors point out that their investigation focuses on explaining and quantifying the deviations of the rule. The paper seeks to identify whether the deviations from the rule are systematic and the factors that explain this deviation it is systematic.

Additionally, it seeks to investigate whether the factors can be identified as being international or domestic and whether the impact of these factors can be quantified. The paper adopts a qualitative design approach in which a three-step econometric procedure is used to analyze economic information from Australian databases in order to identify the deviations of the Taylor rule. The data used in the paper is quarterly, starting from 1994’ s Q1 to 2013’ s Q1. The authors point out that information on real-time seasonally adjusted real GDP was sourced from the Australian Real-time Macroeconomic database.

The methods used in the econometric procedure are OLS regression, factor augmented analysis, and LMA shapely decomposition. OLS regression is used in the first step to estimate the Taylor rule. Real-time data is used in the OLS regression approach with the deviation from the Taylor rule being taken as the residual. In factor augmented analysis, the researchers collated a large macroeconomic data set made up of 229 series and 13 unique categories of domestic and international variables. They also implement the Eigenvalue Ration Test to determine the number of factors created from the principal components of each category of variables.

The LMG-Shapely decomposition is used in the final step to quantify the explanatory power of each individual factor. OLS regression is a linear modeling technique that can be utilized to model a single response variable that has been recorded on an interval scale.

References

Hudson, K. B., & Vespignani, J. (2014). Understanding the Deviations of the Taylor Rule: A New Methodology with an Application to Australia.

IDEAS. Viewed on 7th May 2015 at 4.52 pm

Shorrocks, A. F. (2013). Decomposition procedures for distributional analysis: a unified framework based on the Shapley value. Journal of Economic Inequality, 1-28.

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