Lecture_21_2010 - Intermediate Macroeconomics Bruce Preston Rules versus Discretion Barro-Gordon model underscores Role of strategic interaction

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Intermediate Macroeconomics Bruce Preston April 13, 2010
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Rules versus Discretion Barro-Gordon model underscores Role of strategic interaction and expectations The need for a central bank to internalize the e/ects of policy on expectations formation ± Rules can be superior Older argument for rules: Friedman Long and variable lags of monetary policy prohibit &ne-tuning
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Taylor (1993) Argued in favor of rules, though not literally World too complex for a mechanical formula Important to give indication of systematic conduct: this in f uences expectations
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TheTay lo rRu le Proposed a simple description of policy, 1985 - 1993 i t = π t + 1 2 ˜ Y t + 1 2 ( π t 2) + 2 Historical f t extremely good Implies long-term real interest rate: 2 percent Satis f es so called “Taylor principle”: nominal interest rates move more than proportionately to movements in in F
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TheTay lo rRu leI I More generally and writing in terms of real interest rates R t r + ¯ h ˜ Y t m ( π t ¯ π ) Recall i t = R t + π t : Fisher relation Assume policy parameters ¯ h, ¯ m> 0
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Comprises two key relations: ˜ Y
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This note was uploaded on 02/27/2011 for the course ECONOMICS 201 taught by Professor P during the Spring '11 term at Columbia College.

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Lecture_21_2010 - Intermediate Macroeconomics Bruce Preston Rules versus Discretion Barro-Gordon model underscores Role of strategic interaction

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