Proceedings of the 25th International Academic Conference, OECD Headquarters, Paris

TAYLOR RULES AND THE INTEREST RATE BEHAVIOR IN ALGERIA

SALOUA NASSIMA CHAOUCHE , RACHID TOUMACH

Abstract:

The Taylor rules represent a guideline for central bank while setting their monetary policy in the aim to ensure the macroeconomic stability. The estimated Taylor rule and McCallum rule can be considered as a benchmark explicit formula for the central bank to follow when making monetary policy decisions. The Taylor rules capture the essential of the monetary authority’s behavior, and determine the level of short term interest rates compatible with price stability, keeping the output at its potential level. The gap between the rule’s rate and the observed one is used as an indicator of the appropriatemonetary policy with respect to inflation targeting and output gap targeting. In this work, we tried to asses if the short term interest rates announced by the Algerian Central Bank, fit the different version of The Taylor rule. It is an attempt to assesses the operational performance of three version of the Taylor rules in Algeria over the period 1996–2011 using quarterly data, with a view to analytically informing the conduct of monetary policy. The different estimations showed that the Taylor rule can be somehow and in some version the appropriate predictor of interest rate behavior in Algeria.

Keywords: Monetary policy, Taylor’s rule, Interest rate , Forward-looking , Smoothing Interest rate , Backward-looking

DOI: 10.20472/IAC.2016.025.011

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