Monetary policy/Addendum: Difference between revisions
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The rule recommends a relatively high interest rate (that is, a "tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) in the opposite situations. <ref>John B Taylor "Discretion versus Policy Rules in Practice", in ''Carnegie-Rochester Conference Series on Public Policy'' no 39 1993 [http://www.stanford.edu/~johntayl/Papers/Discretion.PDF John Taylor] </ref><ref>[http://www.stanford.edu/~johntayl/PolRulLink.htm Stanford University Monetary Policy Rule Homepage]</ref><ref>[http://mpra.ub.uni-muenchen.de/18309/1/MPRA_paper_18309.pdf Antonio Forte ''The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?'', Munich Personal RePEc Archive, November 2009]</ref>. | The rule recommends a relatively high interest rate (that is, a "tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) in the opposite situations. <ref>John B Taylor "Discretion versus Policy Rules in Practice", in ''Carnegie-Rochester Conference Series on Public Policy'' no 39 1993 [http://www.stanford.edu/~johntayl/Papers/Discretion.PDF John Taylor] </ref><ref>[http://www.stanford.edu/~johntayl/PolRulLink.htm Stanford University Monetary Policy Rule Homepage]</ref><ref>[http://mpra.ub.uni-muenchen.de/18309/1/MPRA_paper_18309.pdf Antonio Forte ''The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?'', Munich Personal RePEc Archive, November 2009]</ref>. | ||
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Revision as of 03:54, 12 August 2010
The Taylor rule
The rule states that the real short-term interest rate (that is, the interest rate adjusted for inflation) should be determined according to three factors:
- (1) where actual inflation is relative to the targeted level that the Fed wishes to achieve;
- (2) how far economic activity is above or below its "full employment" level; and,
- (3) what the level of the short-term interest rate is that would be consistent with full employment.
The rule recommends a relatively high interest rate (that is, a "tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) in the opposite situations. [1][2][3].
- ↑ John B Taylor "Discretion versus Policy Rules in Practice", in Carnegie-Rochester Conference Series on Public Policy no 39 1993 John Taylor
- ↑ Stanford University Monetary Policy Rule Homepage
- ↑ Antonio Forte The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?, Munich Personal RePEc Archive, November 2009