Forecasting with the Taylor rule

This article uses the Survey of Professional Forecasters (SPF) to investigate the added value of the Taylor rule in interest rate forecasting. We interpret the Taylor rule as a set of macroeconomic restrictions that can be imposed on each individual professional forecaster's predictions of interest rates, inflation and economic activity. We study whether conforming to these restrictions improves forecast accuracy. We find that using the Taylor rule improves forecasts four quarters ahead and conclude that the Taylor rule is a useful tool in forming expectations about future monetary policy.

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