Lesson 20—The Taylor Rule

Lesson 20—The Taylor Rule - Lesson 19-The...

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Lesson 19—The Taylor Rule M&B Chapter 17 Donald Kohn: John Taylor rules http://www.bis.org/review/r071019f.pdf Taylor Rule Change Will Hurt Fed’s Inflation Fight: John Taylor (Bloomberg, August 25, 2009) http://www.bloomberg.com/apps/news?pid=newsarchi
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Simple Taylor Rule Federal funds rate target = inflation rate + equilibrium real fed funds rate + 1/2 (inflation gap) + 1/2 (output gap)
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Taylor Rule’s Estimated Funds Rate vs Actual Funds Rate
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Alternative Version of Taylor Rule Federal Funds Rate Target = Inflation Rate + Real Equilibrium Funds Rate + 0.5 X (Inflation Gap) + 1.5 X (NAIRU – Unemployment Rate)
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Taylor Rule Using Unemployment Rate Gap
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Benefits of Simple Rules in Monetary Policymaking “Despite its simplicity, this policy rule fits the data remarkably well; it described a period of generally successful policymaking; and it adhered to the Taylor principle of adjusting the nominal rate more than one-for-one with changes in the inflation rate, so it provided a plausible template for future success. ”
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Benefit #1 Simple Rules can provide a useful benchmark for policymakers.
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