In a recent speech, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, compared the Fed’s strategy to simple reference rules, including the Taylor rule. This column argues that the comparisons enhance the Fed’s transparency and can help it to stand up to political pressure. However, Chair Yellen also suggests an important role for estimates of medium-run equilibrium real rates. Such estimates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of policy stance.
Henrike Michaelis, Volker Wieland, 03 February 2017
Marcus Miller, Lei Zhang, 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
Pelin Ilbas, Øistein Røisland, Tommy Sveen, 13 February 2013
Economists everywhere recognise the Taylor rule’s importance in monetary policymakers’ decisions. But exactly how important is it? This column aims to analyse the Taylor rule’s influence on US monetary policy by estimating the policy preferences of the Fed. There is a high degree of reluctance to let the interest rate deviate from the Taylor rule and, contrary to the literature and current policy debates, it seems large deviations from the Taylor rule between 2001 and 2006 were in fact due to negative demand-side shocks. During this period, there is in fact no evidence to support the notion of a decreased weight on the Taylor rule.
Olivier Coibion, Yuriy Gorodnichenko, 01 March 2010
How long will US interest rates remain so low? This column argues that estimates using the 1993 Taylor rule are concentrating on the output gap, whereas in reality the Fed places much greater emphasis on output growth. Using an updated Taylor rule, this column favours the market view that rates will rise towards the end of 2010.
Carlo Favero, 18 July 2009
Has the Federal Reserve responded too slowly to macroeconomic conditions during the crisis? This column defends the central bank based on new estimates of the policy function, arguing that it has reacted promptly to a gradually evolving macroeconomic situation.
Jakob de Haan, Jan-Egbert Sturm, 27 June 2009
Should informed observers pay attention to the ECB President? This column says it is worthwhile for financial market participants to read the ECB President’s lips, as this adds information about upcoming interest rate decisions that is not provided by expected inflation and expected output growth.