Targeted Taylor rules: monetary policy responses to demand- and supply-driven inflation

This feature documents that central banks operating under inflation targeting or similar regimes have in practice pursued their objectives in a targeted manner in the sense that they have reacted more forcefully to demand-driven than to supply-driven inflation. This new finding comes from the estimation of Taylor-type monetary policy rules for seven major advanced economies. The estimated targeted response aligns with both monetary theory prescriptions and central banks' doctrine as reflected in their official statements. Our analysis further suggests that during the post-pandemic inflation surge, policy rates were initially slow to respond but eventually caught up with the levels predicted by the targeted Taylor rules.