@article{Projection:893,
      recid = {893},
      author = {Fung, Ben and Maclean, Dinah and Armour, Jamie},
      title = {Taylor Rules in the Quarterly Projection Model},
      publisher = {Bank of Canada},
      address = {2002},
      pages = {1 online resource (vi, 39 pages)},
      abstract = {In recent years, there has been a lot of interest in  Taylor-type rules. Evidence in the literature suggests that  Taylor-type rules are optimal in a number of models and are  fairly robust across different models. The reaction  function in the Bank of Canada's Quarterly Projection Model  (QPM) is an inflation-forecast-based (IFB) rule. A number  of studies have suggested, however, that the optimality of  IFB rules is very model-specific. Given this and concerns  about model uncertainty, it seems logical to assess the  performance of Taylor-type reaction functions in QPM.  Therefore, we compare QPM's IFB rule with a simple Taylor  rule as well as with two rules that include open-economy  elements. Overall, our results suggest that Taylor-type  rules do not perform well in QPM compared with the  base-case IFB rule, since they are associated with  significantly higher variabilities of inflation, output,  and interest rates. However, of the Taylor-type rules  considered, we find that a simple rule with a coefficient  of 2 on the contemporaneous inflation gap (versus 0.5 in  Taylor's original rule) and a coefficient of 0.5 on the  output gap is the most appropriate. Furthermore, the gains  from using open-economy rules seem to be limited.},
      url = {http://www.oar-rao.bank-banque-canada.ca/record/893},
      doi = {https://doi.org/10.34989/swp-2002-1},
}