Tag Archives: Taylor rule

Taylor legislation? Rules versus discretion misunderstood

John B. Taylor is one of the profession’s most recognized macroeconomists, and for good reason. He has made numerous contributions to theories on wage and price formation and monetary policy. Many concepts are so central that they carry his name. “Taylor contracts” (staggered nominal wage or price contracts that are a central ingredient in many macroeconomics models), “Taylor curves” (curves that simply illustrate the feasible monetary policy trade offs), and, of course, the “Taylor Rule”, which is a specification of a nominal interest rate rule for a central bank. Originally mentioned in a 1993 paper, Taylor showed that the simple rule—that recommends that the nominal interest rate adjust to inflation … Continue reading

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One more time for the world: There is no simple relationship (if any) between Taylor-rule coefficients and policy preferences

The lack of a relationship between the size of the coefficients in a Taylor rule for monetary policy conduct and the underlying preferences for stabilization of macroeconomic goals is well known. I often have it as a check subject in my exams in monetary economics. When I present the result to students first time—it is fleshed out in Lars Svensson’s “Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets” (European Economic Review 41, 1997, 1111-1141) for a simple backward-looking IS/AS model—I often state that many tend to overlook this, and that it is a common misconception that, e.g., a relatively high coefficient on the output gap in the rule indicates a … Continue reading

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New-Keynesian explosions: The Cochrane interpretation and explosive solution

John Cochrane has some interesting comments on New Keynesian economics in his latest blog post on “New Keynesian Stimulus“. The interesting is not the part of the blog-literature to which it also contributes; the part about mudslinging in fiscal stimulus discussions, about which prominent economist got basic theory wrong, about who is acting most disrespectful and whatnot. I.e., the extremely counterproductive style of “debate” that was basically initiated by he-who-shall-go-unmentioned for once. I normally find that Cochrane behaves quite academic and adhere to scientific arguments (which is not entirely unfair given that he is a professor of economics), but even he has to defend himself every once in a while, … Continue reading

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Taylor Rules on the Taylor Rule

The rule for nominal interest rate setting that John Taylor proposed in his 1993 paper “Discretion versus Policy Rules in Practice“, Carnegie-Rochester Conference Series on Public Policy 39, 195-214, has had an enormous influence in the macroeconomics profession.  It is safe to say that numerous economists, practitioners and academics alike, since that paper have evaluated monetary policymaking using the Taylor rule as some kind of reference point. Empirically, a plethora of papers have estimated coefficients of Taylor-type rules for different countries during different periods. Theoretically, paper after paper on monetary policymaking adopt some form of the Taylor rule as a default specification of monetary policymaking (even undergraduate text books routinely … Continue reading

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Gavin Davies on the Fed and the ECB

Gavin Davies has an interesting post on his Financial Times blog. It is entitled “Strange bedfellows – the Fed and the ECB” and it discusses the co-movements between the Federal funds rate and the Deutschmark/Euro policy rate since 1987. There seems to be a leader-follower pattern, in the sense that Europe has followed the Fed with a 6-12 month lag. Davies concludes that this “is one of the most well established rules in the analysis of monetary policy making“. This is perhaps a somewhat strong statement, and I would, based on visual inspection (upon which one should be VERY careful), conjecture that most of this correlation is driven by the … Continue reading

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Simple Policy Rules or Simple Consumption Rules? A Semi-serious Comparison Based on Brain Usage

Let me start this post with a warning. As indicated by the title, it will involve semi-serious thoughts, which in this case is equivalent to semi-humorous thoughts. So the contents are intended as a sort of economists’ joke (which may not be funny to that many, if any, besides me). Also, in order to understand the fun, it will require some knowledge about graduate dynamic macroeconomics, more specifically the continuous-time Ramsey-Kass-Koopmans model. With this warning, I proceed. In recent macroeconomic literature on monetary and fiscal stabilization policies, researchers often characterize the optimal stabilization policy in a conventional public-finance fashion. Then, many argue that such a policy is too complicated to … Continue reading

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A Credible Anti-Inflationary Central Bank Ignores Inflation

Today, the European Central Bank decided to keep its policy rate unchanged. I am not particularly surprised. In recent empirical work, Morten Aastrup and I estimate what determines the ECB’s interest-rate changes. It turns out that inflation or expectations thereof play no role. Instead, changes in economic activity as measured by Euro-area unemployment is an important determinant. Americans who cling to the idea that good monetary policymaking is characterized by an adherence to a variant of John B. Taylor’s rule that carries his name, may find this surprising. However, consistent with modern New-Keynesian theory (cf. Michael Woodford’s Interest and Prices, Princeton University Press, 2003), a credible anti-inflationary central bank can … Continue reading

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