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An empirical investigation of the Taylor curve

  • Olson, Eric
  • Enders, Walter
  • Wohar, Mark E.

Taylor (1979) posited that a central bank faces a tradeoff between the volatility of the output gap and volatility of inflation; this trade-off has become known as the Taylor curve. Thus, the Taylor curve necessitates that the correlation between the volatilities of inflation and the output gap be non-positive for optimal monetary policy. Friedman (2006) challenged Chatterjee (2002) and Taylor’s (2006) view that the Taylor curve may be used as a policy menu from which the central bank may choose the level of inflation and output gap volatilities. To better understand the issue, we take an in depth look at the correlation between the second moments of inflation and the output gap through the lens of the Taylor curve. Our results reveal that macroeconomic performance is superior in time periods in which the Taylor curve relationship holds.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 2 ()
Pages: 380-390

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:2:p:380-390
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2004. "Has Monetary Policy Become More Efficient? A Cross Country Analysis," NBER Working Papers 10973, National Bureau of Economic Research, Inc.
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  16. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
  17. James Peery Cover & C. James Hueng, 2003. "The Correlation between Shocks to Output and the Price Level: Evidence from a Multivariate GARCH Model," Southern Economic Journal, Southern Economic Association, vol. 70(1), pages 75-92, July.
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