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The Taylor Rule and the Practice of Central Banking

In: The Taylor Rule and the Transformation of Monetary Policy

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  • George A. Kahn

Abstract

The Taylor rule has revolutionized the way many policymakers at central banks think about monetary policy. It has framed policy actions as a systematic response to incoming information about economic conditions, as opposed to a period-by-period optimization problem. It has emphasized the importance of adjusting policy rates more than one-for-one in response to an increase in inflation. And, various versions of the Taylor rule have been incorporated into macroeconomic models that are used at central banks to understand and forecast the economy. ; This paper examines how the Taylor rule is used as an input in monetary policy deliberations and decision-making at central banks. The paper characterizes the policy environment at the time of the development of the Taylor rule and describes how and why the Taylor rule became integrated into policy discussions and, in some cases, the policy framework itself. Speeches by policymakers and transcripts and minutes of policy meetings are examined to explore the practical uses of the Taylor rule by central bankers. While many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, the paper shows that the rule has advanced the practice of central banking.

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This chapter was published in:

  • Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), 2012. "The Taylor Rule and the Transformation of Monetary Policy," Books, Hoover Institution, Stanford University, number 4.
    This item is provided by Hoover Institution, Stanford University in its series Book Chapters with number 4-3.

    Handle: RePEc:hoo:bookch:4-3

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    Cited by:
    1. Ellen E. Meade & Daniel L. Thornton, 2010. "The Phillips curve and US monetary policy: what the FOMC transcripts tell us," Working Papers 2010-017, Federal Reserve Bank of St. Louis.
    2. Klaus Schmidt-Hebbel & Francisco Muñoz, 2012. "Monetary policy decisions by the world's central banks using real-time data," Documentos de Trabajo 426, Instituto de Economia. Pontificia Universidad Católica de Chile..
    3. Julio J. Rotemberg, 2013. "Shifts in US Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 65-86, Fall.
    4. Ronny Mazzocchi, 2013. "Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation," DEM Discussion Papers 2013/16, Department of Economics and Management.
    5. Tillmann, Peter, 2012. "Cross-checking optimal monetary policy with information from the Taylor rule," Economics Letters, Elsevier, vol. 117(1), pages 204-207.
    6. Kahn, George A. & Taylor, Lisa, 2014. "Evolving market perceptions of Federal Reserve policy objectives," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 1-64.
    7. Aastrup, Morten & Jensen, Henrik, 2010. "What Drives the European Central Bank's Interest-Rate Changes?," CEPR Discussion Papers 8160, C.E.P.R. Discussion Papers.

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