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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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File URL: http://research.stlouisfed.org/publications/review/12/01/41-64Gavin.pdf
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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. Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
  2. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  3. Michael R. Pakko, 2005. "No smoking at the slot machines: the effect of a smoke-free law on Delaware gaming revenues," Working Papers 2005-054, Federal Reserve Bank of St. Louis.
  4. 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.).
  5. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  6. Athanasios Orphanides & Simon van Norden, 2001. "The Unreliability of Output Gap Estimates in Real Time," CIRANO Working Papers 2001s-57, CIRANO.
  7. Olivier Coibion & Yuriy Gorodnichenko & Johannes F. Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," NBER Working Papers 16093, National Bureau of Economic Research, Inc.
  8. William T. Gavin, 2011. "CPI inflation: running on motor fuel," Economic Synopses, Federal Reserve Bank of St. Louis.
  9. 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.
  10. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2005. "The monetary instrument matters," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 633-658.
  11. 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.
  12. 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.
  13. 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.).
  14. Gaspar, Vítor & Smets, Frank & Vestin, David, 2007. "Is time ripe for price level path stability?," Working Paper Series 0818, European Central Bank.
  15. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
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