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The Taylor Rule and Evaluation of U.S. Monetary Policy

In: The Financial Crisis and Federal Reserve Policy

Author

Listed:
  • Lloyd B. Thomas

Abstract

Among economists, a long-standing debate involves the “rules versus discretion” issue in monetary policy. A monetary policy rule is an arrangement in which the central bank announces in advance a specific objective (or objectives) and commits itself to using its policy instruments rigorously to achieve the explicit objective(s). For example, if a central bank employs an explicit 2 percent inflation targeting rule, it will raise interest rates when actual or expected inflation exceeds 2 percent, and reduce interest rates when inflation or expected inflation falls below 2 percent. This type of monetary policy regime contrasts with a system of discretionary monetary policy, in which the central bank is given maximum latitude to employ its judgment in conducting policy.

Suggested Citation

  • Lloyd B. Thomas, 2011. "The Taylor Rule and Evaluation of U.S. Monetary Policy," Palgrave Macmillan Books, in: The Financial Crisis and Federal Reserve Policy, chapter 0, pages 193-212, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-11807-2_11
    DOI: 10.1057/9780230118072_11
    as

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