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The Explanatory Power of Monetary Policy Rules

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  • John B. Taylor

Abstract

This paper shows that the theory of monetary policy rules is able to explain, predict, and help understand a variety of phenomenon in macroeconomics and finance, including the Great Moderation, the correlation between exchange rates and interest rates, and the shift in the response of the term structure of interest rates to inflation and output. Although the theory was originally designed for normative reasons, it has turned out to have positive implications which validate it scientifically. And while initially focused on the United States, it has applied equally well in other countries.

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File URL: http://www.nber.org/papers/w13685.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13685.

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Date of creation: Dec 2007
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Handle: RePEc:nbr:nberwo:13685

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  1. Charles Engel & Kenneth D. West, 2004. "Taylor Rules and the Deutschmark-Dollar Real Exchange Rate," NBER Working Papers 10995, National Bureau of Economic Research, Inc.
  2. John P. Judd & Bharat Trehan, 1995. "Has the Fed gotten tougher on inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar31.
  3. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco.
  4. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not As Bad As You Think," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441 National Bureau of Economic Research, Inc.
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Cited by:
  1. Fernando Alexandre & Pedro Bação & Vasco Gabriel, 2008. "Taylor-type rules versus optimal policy in a Markov-switching economy¤," School of Economics Discussion Papers 0608, School of Economics, University of Surrey.
  2. Bohl , Martin T & Mayes , David G & Siklos, Pierre L, 2009. "The quality of monetary policy and inflation performance: globalization and its aftermath," Research Discussion Papers 31/2009, Bank of Finland.
  3. Giorgio Fagiolo & Andrea Roventini, 2008. "On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms," LEM Papers Series 2008/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  4. Alexandre, Fernando & Bação, Pedro & Gabriel, Vasco, 2010. "Soft landing in a Markov-switching economy," Economics Letters, Elsevier, vol. 107(2), pages 169-172, May.

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