I tried to add credit growth to the monetary policy. When I did a welfare analysis and extracted the volatility, I found that the monetary policy that added credit growth had a greater volatility than the Taylor rule. What happened? It’s a little hard to explain.
The credit gap volatility of the Taylor rule is 0.3760, and the credit gap volatility of my monetary policy is 0.4960.
Why is that hard to explain? The Taylor rule is a feedback rule that will influence the behavior of other variables in the model. If credit growth is endogenous that can happen.