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Taylor-type rules and total factor productivity

  • William T. Gavin
  • Benjamin D. Keen
  • Michael R. Pakko

This paper examines the impact of a persistent shock to the growth rate of total factor productivity in a New Keynesian model in which the central bank does not observe the shock. The authors then investigate the performance of alternative policy rules in such an incomplete information environment. While some rules perform better than others, the authors demonstrate that inflation is more stable after a persistent productivity shock when monetary policy targets the output growth rate (not the output gap) or the price-level path (not the inflation rate). Both the output growth and price-level path rules generate less volatility in output and inflation following a persistent productivity shock compared with the Taylor rule.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2012)
Issue (Month): Jan ()
Pages: 41-64

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Handle: RePEc:fip:fedlrv:y:2012:i:jan:p:41-64:n:v.94no.1
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  1. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
  2. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," Working Papers 91, Department of Economics, College of William and Mary.
  3. Athanasios Orphanides & Simon van Norden, 2001. "The Unreliability of Output Gap Estimates in Real Time," CIRANO Working Papers 2001s-57, CIRANO.
  4. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
  5. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2004. "Learning and shifts in long-run productivity growth," Finance and Economics Discussion Series 2004-21, Board of Governors of the Federal Reserve System (U.S.).
  6. Michael Pakko, 2008. "No smoking at the slot machines: the effect of a smoke-free law on Delaware gaming revenues," Applied Economics, Taylor & Francis Journals, vol. 40(14), pages 1769-1774.
  7. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2005. "The monetary instrument matters," Working Papers 2004-026, Federal Reserve Bank of St. Louis.
  8. Christopher Otrok & Andre Kurmann, 2010. "News Shocks and the Slope of the Term Structure of Interest Rates," 2010 Meeting Papers 72, Society for Economic Dynamics.
  9. 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.
  10. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  11. 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.
  12. William T. Gavin, 2011. "CPI inflation: running on motor fuel," Economic Synopses, Federal Reserve Bank of St. Louis.
  13. Vítor Gaspar & Frank Smets & David Vestin, 2007. "Is Time Ripe for Price Level Path Stability?," Working Papers w200719, Banco de Portugal, Economics and Research Department.
  14. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
  15. anonymous, 2005. "Models and monetary policy: research in the tradition of Dale Henderson, Richard Porter, and Peter Tinsley," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
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