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The Taylor Rule and its relevance to New Zealand monetary policy

Author

Listed:
  • Chris Plantier
  • Dean Scrimgeour

    (Reserve Bank of New Zealand)

Abstract

The Taylor rule is a simple formula devised to mimic the United States Federal Reserve's interest rate decisions and is thought to perform well in the United States. It is based on relationships between the output gap, neutral real interest rates and the extent to which actual inflation has departed from the desired inflation rate. This article discusses some strengths and weaknesses of the Taylor rule, and then puts it into the New Zealand context. To the extent that it is appropriate for New Zealand, the Taylor rule might provide a useful input into the monetary policy decision-making process at the Reserve Bank. We compare New Zealand's short-term interest rate path with that suggested by the Taylor rule, and discuss how the Bank can use the Taylor rule as part of its framework for thinking about interest rate decisions.

Suggested Citation

  • Chris Plantier & Dean Scrimgeour, 2002. "The Taylor Rule and its relevance to New Zealand monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, March.
    • Handle: RePEc:nzb:nzbbul:march2002:1
    as

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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2002/2002mar65-1PlantierScrimgeour.pdf
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    References listed on IDEAS

    as
    1. Batini, Nicoletta & Nelson, Edward, 2001. "Optimal horizons for inflation targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 891-910, June.
    2. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
    3. Paul Conway & Aaron Drew & Ben Hunt & Alasdair Scott, 1998. "Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS," Reserve Bank of New Zealand Discussion Paper Series G99/4, Reserve Bank of New Zealand.
    4. Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September.
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    Cited by:

    1. Tim Hampton, 2002. "The role of the Reserve Bank's macro model in the formation of interest rate projections," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, June.
    2. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    3. Saloua Nassima Chaouche & Rachid Toumach, 2016. "Taylor Rules and the interest rate behavior in Algeria," Proceedings of International Academic Conferences 4106716, International Institute of Social and Economic Sciences.

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