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The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules

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  • John B. Taylor

Abstract

This paper shows that different models of the monetary transmission mechanism lead to surprisingly similar choices about monetary policy rules. In particular, simple rules in which the interest rate reacts to inflation and real output seem to be robust to many different views about how monetary policy works. In models of small open economies—where the monetary transmission mechanism has a relatively strong exchange rate channel—the policy rule should also adjust to the exchange rate, but the gains from such exchange rate rules over rules that react only to inflation and output are small. The results suggest the need for more research on both the effect of exchange rate fluctuations and on policy rules that take account of exchange rates.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 87.

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Date of creation: Dec 2000
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Handle: RePEc:chb:bcchwp:87

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc.
  2. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  4. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  5. L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued) 33, Netherlands Central Bank.
  6. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July.
  7. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  8. Jeff Fuhrer & Brian Madigan, 1994. "Monetary policy when interest rates are bounded at zero," Working Papers in Applied Economic Theory 94-06, Federal Reserve Bank of San Francisco.
  9. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
  10. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
  11. Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
  12. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  14. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  15. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: preparing economic projections," Reserve Bank of New Zealand Discussion Paper Series G98/7, Reserve Bank of New Zealand.
  16. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
  17. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
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Cited by:
  1. Frömmel, Michael & Schobert, Franziska, 2006. "Monetary Policy Rules in Central and Eastern Europe," Hannover Economic Papers (HEP) dp-341, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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