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Simple and Robust Rules for Monetary Policy

In: Handbook of Monetary Economics

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Author Info

  • Taylor, John B.
  • Williams, John C.

Abstract

This paper focuses on simple normative rules for monetary policy that central banks can use to guide their interest rate decisions. Such rules were first derived from research on empirical monetary models with rational expectations and sticky prices built in the 1970s and 1980s. During the past two decades substantial progress has been made in establishing that such rules are robust. They perform well with a variety of newer and more rigorous models and policy evaluation methods. Simple rules are also frequently more robust than fully optimal rules. Important progress has also been made in understanding how to adjust simple rules to deal with measurement error and expectations. Moreover, historical experience has shown that simple rules can work well in the real world in that macroeconomic performance has been better when central bank decisions were described by such rules. The recent financial crisis has not changed these conclusions, but it has stimulated important research on how policy rules should deal with asset bubbles and the zero bound on interest rates. Going forward, the crisis has drawn attention to the importance of research on international monetary issues and on the implications of discretionary deviations from policy rules.

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This chapter was published in:

  • Benjamin M. Friedman & Michael Woodford (ed.), 2010. "Handbook of Monetary Economics," Handbook of Monetary Economics, Elsevier, edition 1, volume 3, number 3, January.
    This item is provided by Elsevier in its series Handbook of Monetary Economics with number 3-15.

    Handle: RePEc:eee:monchp:3-15

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    Web page: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description

    Related research

    Keywords: Monetary Policy; Monetary Theory; New Monetarism;

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Janet Yellen Gives First Speech On Monetary Policy As Fed Chair
      by Matthew Boesler in Business Insider on 2014-04-16 16:25:00
    2. Yellen: Monetary Policy and the Economic Recovery
      by Mark Thoma in Economist's View on 2014-04-16 10:08:01
    3. Should Congress legislate so that the Fed is forced to follow policy rules?
      by Tony Yates in longandvariable on 2014-07-08 16:54:07
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