Template-type: ReDIF-Paper 1.0
Author-Name: Gianfranco Zampese
Title: Taylor Rule and Financial Instability
Abstract: This paper estimates an augmented/non-linear Taylor rule for the ECB and the Riksbank to include financial instability factors. The existence of nonlinearities will be explored and assessed through the estimation of a threshold regression model. The threshold model divides the sample in two distinct subsamples, each representative of a different regime. A composite indicator of systemic stress characterizes the two regimes into a low instability regime and a high instability regime. The results are quite clear. They show us that the classical Taylor rule performs well during Regime 1, or “normal administration times"; but it shows inherently weaknesses in describing the behavior of CBs during financial instability periods, when discretion may be necessary. Remarkably such a non-linear model is also successful in not crossing the ZLB.
Classification-JEL:
Keywords:
Length: 70 pages 
Number: 1757
Creation-Date: 2017
File-URL: https://repec.unibocconi.it/baffic/baf/papers/cbafwp1757.pdf
File-Format: application/pdf
File-Size: 2462
Handle: RePEc:baf:cbafwp:cbafwp1757