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Inertial Taylor rules: the benefit of signaling future policy

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Author Info

  • Charles T. Carlstrom
  • Timothy S. Fuerst

Abstract

This article traces the consequences of an energy shock on the economy under two different monetary policy rules: (i) a standard Taylor rule, where the Fed responds to inflation and the output gap, and (ii) a Taylor rule with inertia, where the Fed moves slowly to the rate predicted by the standard rule. The authors show that, with both sticky wages and sticky prices, the outcome of an inertial Taylor rule is superior to that of the standard rule, in the sense that inflation is lower and output is higher following an adverse energy shock. However, if prices alone are sticky, the results are less clear and the standard rule delivers substantially less inflation than the inertial rule in the short run.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2008)
Issue (Month): May ()
Pages: 193-203

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Handle: RePEc:fip:fedlrv:y:2008:i:may:p:193-203:n:v.90no.3,pt.2

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Related research

Keywords: Taylor's rule;

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References

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  1. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  2. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
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Cited by:
  1. Alper, Emre & Hatipoglu, Ozan, 2009. "The Conduct of Monetary Policy in Turkey in the Pre- and Post-crisis Period of 2001 in Comparative Perspective: a Case for Central Bank Independence," MPRA Paper 18426, University Library of Munich, Germany.

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