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Federal Reserve Bank of Cleveland
Economic Commentary
Using an Improved Taylor Rule to Predict When Policy Changes Will Occur
Charles T. Carlstrom
Saeed Zaman
Abstract

A standard Taylor rule, which expresses the federal funds rate as a function of inflation, the unemployment gap, and the past federal funds rate, tracks the federal funds rate well over time. We improve the fit by adding employment growth. Then we evaluate the effectiveness of that rule in a new way—by how accurately it predicts whether the FOMC moves the fed funds rate at its next meeting. It does pretty well, predicting nearly 70 percent of the time correctly.


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Charles T. Carlstrom & Saeed Zaman, "Using an Improved Taylor Rule to Predict When Policy Changes Will Occur" , Federal Reserve Bank of Cleveland, Economic Commentary, issue March, 2014.
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