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From Friedman to Taylor: The Revival of Monetary Policy Rules in the 1990s

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Abstract

This paper examines the revival in the analysis of monetary policy rules that took place during the 1990s. The focus is on the role that John Taylor played in this revival. It is argued that Taylor’s role—most notably through his advancing the Taylor rule, developed in 1992−1993 and increasingly permeating discussions in research and policy circles over the subsequent several years—is usefully viewed as one of building bridges. In particular, Taylor created links between a monetary policy rules tradition closely associated with Milton Friedman and an interest-rate setting tradition long associated with central banks. The rules tradition had looked unfavorably on interest-rate setting, while the central bank tradition was unfavorably disposed toward monetary policy rules. The Taylor rule provided a compromise between the traditions, while also advancing an interest-rate reaction function that helped create a revival during the 1990s of economic research on monetary policy rules.

Suggested Citation

  • Edward Nelson, 2025. "From Friedman to Taylor: The Revival of Monetary Policy Rules in the 1990s," Finance and Economics Discussion Series 2025-023r1, Board of Governors of the Federal Reserve System (U.S.), revised 14 May 2025.
  • Handle: RePEc:fip:fedgfe:2025-23
    DOI: 10.17016/FEDS.2025.023r1
    Note: Revision
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    References listed on IDEAS

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    Keywords

    Taylor rule; Interest rate rules;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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