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Targeted Taylor rules: some evidence and theory

Author

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  • Boris Hofmann
  • Cristina Manea
  • Benoit Mojon

Abstract

The paper introduces the concept of a targeted Taylor rule defined as a monetary policy rule which allows for different responses to demand– and supply–driven inflation. This new concept tallies with Federal Reserve's monetary policy strategy as reflected in its official communications. When estimated for the United States using recent decompositions of inflation in demand and supply factors, this new type of rule points to an almost fourfold stronger monetary policy reaction to demand– than to supply–driven inflation starting with Paul Volker's Chairmanship. We show how to embed the new targeted rule into a textbook New-Keynesian model when the economy is simultaneously hit by demand and supply shocks, and discuss its implications for business cycle fluctuations and welfare.

Suggested Citation

  • Boris Hofmann & Cristina Manea & Benoit Mojon, 2024. "Targeted Taylor rules: some evidence and theory," BIS Working Papers 1234, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1234
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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