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Number 6, June 2008
The Relative Performance of Alternative Taylor Rule Specifications
Adriana Z. Fernandez,
Evan F. Koenig, Alex Nikolsko-Rzhevskyy
Complete Issue 
Abstract
We look at how well several alternative Taylor rule specifications describe
Federal Reserve policy decisions in real time, using the newly developed
Giacomini and Rossi (2007) test for non-nested model selection
in the presence of (possible) parameter instability. Further, we isolate
those Taylor rule features that are most important for achieving relatively
strong real-time performance. A second-order partial adjustment version
of the Koenig (2004a) model performs consistently better than alternative
specifications. Key features of this rule are the partial adjustment of the
federal funds rate toward an equilibrium rate that depends on the unemployment
rate and forward-looking inflation measures.
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