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The Taylor Rule and the Practice of Central Banking

In: The Taylor Rule and the Transformation of Monetary Policy

  • George A. Kahn

The Taylor rule has revolutionized the way many policymakers at central banks think about monetary policy. It has framed policy actions as a systematic response to incoming information about economic conditions, as opposed to a period-by-period optimization problem. It has emphasized the importance of adjusting policy rates more than one-for-one in response to an increase in inflation. And, various versions of the Taylor rule have been incorporated into macroeconomic models that are used at central banks to understand and forecast the economy. ; This paper examines how the Taylor rule is used as an input in monetary policy deliberations and decision-making at central banks. The paper characterizes the policy environment at the time of the development of the Taylor rule and describes how and why the Taylor rule became integrated into policy discussions and, in some cases, the policy framework itself. Speeches by policymakers and transcripts and minutes of policy meetings are examined to explore the practical uses of the Taylor rule by central bankers. While many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, the paper shows that the rule has advanced the practice of central banking.

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This chapter was published in:
  • Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), 2012. "The Taylor Rule and the Transformation of Monetary Policy," Books, Hoover Institution, Stanford University, number 4.
  • This item is provided by Hoover Institution, Stanford University in its series Book Chapters with number 4-3.
    Handle: RePEc:hoo:bookch:4-3
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