Stock Return Predictability and the Taylor Rule
The paper uses real-time data to show that inflation and output gap, the variables that typically enter Taylor rules for interest rate setting, can provide evidence of out-of-sample predictability for stock returns from 1969 to 2008. In addition to out-of-sample tests that are based on mean squared prediction error comparisons, we test for the dependence of stock returns on Taylor rule predictors using the information about the whole distribution. The evidence is robust to using various measures of output gap and window sizes. Investor can time the market using Taylor rule fundamentals and generate higher utility.
Link al Paper