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Taylor-type rules and total factor productivity

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  • William T. Gavin
  • Benjamin D. Keen
  • Michael R. Pakko

Abstract

This paper examines the impact of a persistent shock to the growth rate of total factor productivity in a New Keynesian model in which the central bank does not observe the shock. The authors then investigate the performance of alternative policy rules in such an incomplete information environment. While some rules perform better than others, the authors demonstrate that inflation is more stable after a persistent productivity shock when monetary policy targets the output growth rate (not the output gap) or the price-level path (not the inflation rate). Both the output growth and price-level path rules generate less volatility in output and inflation following a persistent productivity shock compared with the Taylor rule.

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Bibliographic Info

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

Volume (Year): (2012)
Issue (Month): Jan ()
Pages: 41-64

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Handle: RePEc:fip:fedlrv:y:2012:i:jan:p:41-64:n:v.94no.1

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Keywords: Taylor's rule ; Productivity ; Industrial productivity;

References

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  1. Edge, Rochelle M. & Laubach, Thomas & Williams, John C., 2007. "Learning and shifts in long-run productivity growth," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2421-2438, November.
  2. Michael Pakko, 2008. "No smoking at the slot machines: the effect of a smoke-free law on Delaware gaming revenues," Applied Economics, Taylor & Francis Journals, vol. 40(14), pages 1769-1774.
  3. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2005. "The monetary instrument matters," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 633-658.
  4. André Kurmann & Christopher Otrok, 2010. "News Shocks and the Slope of the Term Structure of Interest Rates," Cahiers de recherche 1005, CIRPEE.
  5. Olivier Coibion & Yuriy Gorodnichenko & Johannes F. Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," NBER Working Papers 16093, National Bureau of Economic Research, Inc.
  6. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  7. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  8. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
  9. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
  10. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  11. Vítor Gaspar & Frank Smets & David Vestin, 2007. "Is Time Ripe for Price Level Path Stability?," Working Papers w200719, Banco de Portugal, Economics and Research Department.
  12. William T. Gavin, 2011. "CPI inflation: running on motor fuel," Economic Synopses, Federal Reserve Bank of St. Louis.
  13. anonymous, 2005. "Models and monetary policy: research in the tradition of Dale Henderson, Richard Porter, and Peter Tinsley," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  14. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, July.
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