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Activist stabilization policy and inflation: the Taylor rule in the 1970s

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Author Info
Athanasios Orphanides

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Abstract

A number of recent studies have suggested that activist stabilization policy rules responding to inflation and the output gap can attain simultaneously a low and stable rate of inflation as well as a high degree of economic stability. The foremost example of such a strategy is the policy rule proposed by Taylor (1993). In this paper, I demonstrate that the policy settings that would have been suggested by this rule during the 1970s, based on real-time data published by the U.S. Commerce Department, do not greatly differ from actual policy during this period. To the extent macroeconomic outcomes during this period are considered unfavorable, this raises questions regarding the usefulness of this strategy for monetary policy. To the extent the Taylor rule is believed to provide a reasonable guide to monetary policy, this finding raises questions regarding earlier critiques of monetary policy during the 1970s.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-13.

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Date of creation: 2000
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Handle: RePEc:fip:fedgfe:2000-13

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Related research
Keywords: Monetary policy ; Inflation (Finance);

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This paper has been announced in the following NEP Reports: This item is featured on the following reading lists:
  1. Advanced Monetary Theory and Policy (ECON 447)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  2. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  3. Stein, Herbert, 1996. "A Successful Accident: Recollections and Speculations about the CEA," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 3-21, Summer. [Downloadable!] (restricted)
  4. Bennett T. McCallum & Edward Nelson, 1998. "Performance of Operational Policy Rules in an Estimated Semi-Classical Structural Model," NBER Working Papers 6599, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1, September.
  7. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  8. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA. [Downloadable!]
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  9. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier. [Downloadable!] (restricted)
  10. Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band Pass Filter," NBER Working Papers 7257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band pass filter," Working Paper 9906, Federal Reserve Bank of Cleveland. [Downloadable!]
    • Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05. [Downloadable!] (restricted)
  11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  12. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  13. Bennett McCallum, 1994. "Specification of Policy Rules and Performance Measures in Multicountry Simulation Studies," NBER Working Papers 4233, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc. [Downloadable!]
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  15. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, September.
  16. Robert L. Hetzel, 1998. "Arthur Burns and inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-44. [Downloadable!]
  17. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier. [Downloadable!] (restricted)
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  18. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Robert R Tchaidze, 2001. "Estimating Taylor Rules in a Real Time Setting," Economics Working Paper Archive 457, The Johns Hopkins University,Department of Economics. [Downloadable!]
  2. Robert Tchaidze, 2002. "Greenspan and the Greenbook," Economics Working Paper Archive 472, The Johns Hopkins University,Department of Economics. [Downloadable!]
  3. Ben Hunt, 2005. "Oil Price Shocks: Can They Account for the Stagflation in the 1970s?," IMF Working Papers 05/215, International Monetary Fund. [Downloadable!]
  4. Athanasios Orphanides, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Finance and Economics Discussion Series 2001-62, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Papers in Applied Economic Theory 2003-01, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  6. Lindé, Jesper, 2001. "Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach," Working Paper Series 129, Sveriges Riksbank (Central Bank of Sweden), revised 30 Apr 2001. [Downloadable!]
    Other versions:
  7. Nandwa, B., 2006. "Implication of the Taylor Rule on Real Exchange Rate Movement in Kenya," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2). [Downloadable!] (restricted)
  8. W. Douglas McMillin & James S. Fackler, . "Evaluating Monetary Policy Options," Departmental Working Papers 2001-09, Department of Economics, Louisiana State University. [Downloadable!]
    Other versions:
  9. Athanasios Orphanides, 2002. "Monetary policy rules and the Great Inflation," Finance and Economics Discussion Series 2002-8, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  10. Luca Benati, . "Band-pass filtering, cointegration, and business cycle analysis," Bank of England working papers 142, Bank of England. [Downloadable!]
  11. Stephen P Millard & Simon J Wells, . "The role of asset prices in transmitting monetary and other shocks," Bank of England working papers 188, Bank of England. [Downloadable!]
  12. Salyer, Kevin & Van Gaasback, Kristin, 2000. "A New Application of Taylor Rules: Model Evaluation," Working Papers 00-13, University of California at Davis, Department of Economics. [Downloadable!]
    Other versions:
  13. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  14. Pytlarczyk, Ernest, 2005. "An estimated DSGE model for the German economy within the euro area," Discussion Paper Series 1: Economic Studies 2005,33, Deutsche Bundesbank, Research Centre. [Downloadable!]
  15. Scott Schuh, 2001. "An evaluation of recent macroeconomic forecast errors," New England Economic Review, Federal Reserve Bank of Boston, pages 35-56. [Downloadable!]
  16. Lindé, Jesper, 2001. "The Empirical Relevance of Simple Forward- and Backward-looking Models: A View from a Dynamic General Equilibrium Model," Working Paper Series 130, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  17. Jean-Marc Natal, 2009. "Monetary policy response to oil price shocks," Working Paper Series 2009-16, Federal Reserve Bank of San Francisco. [Downloadable!]
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