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International Monetary Policy: A Global Taylor Rule

  • John Huston
  • Roger Spencer
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    John Taylor’s rule for setting interest rates provides a framework for studying the global monetary policy generated by individual countries pursing their own policy goals. The study reflects the global nature of monetary policy by modeling an aggregate short-term interest rate as a function of measures of worldwide inflation and the GDP gap. Multiple specifications are estimated to correspond to past studies of the U.S. relationships between these variables. The authors find that Taylor rule is a useful tool for characterizing the global monetary environment as his equation provides a good fit to the data in every specification explored by the authors. However, the international response to inflation is slightly less robust despite claims of inflation targeting by the bulk of the larger economies in the sample. Copyright International Atlantic Economic Society 2005

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    File URL: http://hdl.handle.net/10.1007/s11294-005-3010-0
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    Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

    Volume (Year): 11 (2005)
    Issue (Month): 2 (May)
    Pages: 125-134

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    Handle: RePEc:kap:iaecre:v:11:y:2005:i:2:p:125-134
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    1. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
    2. Rudebusch, Glenn D. & Svensson, Lars E. O., 2002. "Eurosystem monetary targeting: Lessons from U.S. data," European Economic Review, Elsevier, vol. 46(3), pages 417-442, March.
    3. Christopher J. Neely, 2001. "International interest rate linkages," International Economic Trends, Federal Reserve Bank of St. Louis, issue Aug.
    4. Paul Bergin, 2002. "Is there a role for international policy coordination?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb8.
    5. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers 2271, C.E.P.R. Discussion Papers.
    6. Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December.
    7. Gert Peersman & Frank Smets, 1999. "Uncertainty and the Taylor rule in a simple model of the Euro-area economy," Proceedings, Federal Reserve Bank of San Francisco.
    8. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
    9. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
    10. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
    11. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
    12. Francisco De A. Nadal-De Simone, 2001. "Inflation Targeters In Practice: A Lucky Lot?," Contemporary Economic Policy, Western Economic Association International, vol. 19(3), pages 239-253, 07.
    13. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    14. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    15. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
    16. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
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