Authors: Qijia Wei and Bruce Morley
The aim of this paper is to determine whether house price volatility has been an important determinant of the Taylor’s rule interest rate over the previous twenty years, leading up to the current financial crisis. One explanation for the financial crisis has been inappropriate interest policy, especially with respect to the housing market, which we attempt to analyse in the context of the Taylor rule. A GARCH specification has been used to produce a time-varying measure of volatility, which is added to the conventional Taylor rule model. The results indicates that it has had a significant effect on the interest rate,
but that its addition only produces a slightly better fit to the actual interest rate over the sample.
Keywords: component: Taylor rule, monetary policy, volatility