John Brian Taylor on Taylor Rule - Dictionary of Arguments
Mause I 231
Taylor Rule/State intervention/Monetary policy/Taylor: The Taylor rule for state intervention is based on money market rates. Taylor tried to identify the relationship between interest rate developments and the potential final target variables in the US using a policy response function. (1),(2)
As a rule, the Federal Reserve System's Open Market Committee (FOMC) has changed the Federal Funds Rate whenever there have been deviations between the current (average) and desired rate of inflation (inflation gap) and differences between the real domestic product and a long-term equilibrium level (output gap).
The central bank increases the money market rate with rising inflation and higher economic growth and vice versa (feedback rule). If the Taylor rule is to be operationalised, statements on the long-term (equilibrium) real interest rate level, the inflation rate and domestic product targets and information on the reaction parameters are required.
Problem: the required data is only available with a time delay and will also be readjusted frequently and to a not inconsiderable extent in the following period.
VsTaylor: Monetary policy should not react to historical values of the inflation or output gap, but anticipate the gaps expected in the future and initiate appropriate countermeasures. See also Edge Width Problem.
1. John B. Taylor,“Discretion Versus Policy Rules in Practice”, Carnegie-Rochester Conference Series on Public Policy 39, 1993 p. 195– 214.
2. John B. Taylor, “A Historical Analysis of Monetary Policy Rules,” In Monetary Policy Rules, J.B. Taylor, ed. Chicago 1999._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
John Brian Taylor
Discretion Versus Policy Rules in Practice 1993
Central Bankers, Inflation, and the Next Recession, in: Institute for New Economic Thinking (03/09/19), URL: http://www.ineteconomics.org/perspectives/blog/central-bankers-inflation-and-the-next-recession 9/3/2019
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