On the rising uncertainties and deviations from rules

What the paper says

Purpose The main objective of this study is to analyse the relationship between deviations from monetary policy rules and economic and financial uncertainties in the axis of the “Rules vs Discretion” discussion. Design/methodology/approach In this respect, the causality relationship between the variables was investigated with the help of nonlinear econometric models. In addition, based on a distinction that is often made in the economic literature, the monetary policies of the FED were divided into two as a rule-based period and a discretionary period. Findings The results indicate that rule-based monetary policies are less likely to trigger a crisis than discretionary policies. Moreover, it is seen that the causality relationship between the variables tends to disappear during the periods when uncertainties are at the highest level. This situation can be evaluated as follows: high and long-term uncertainties start to be normalized by economic actors. Originality/value Furthermore, in this study, the output gap variable in the Taylor rule equation was calculated with three different methods, and the differences caused by the methods in terms of the FED’s power to explain the monetary policies were examined, bringing a new perspective to discussions on this subject.