Taylors Rule

(redirected from Taylor's Rule)

Taylors Rule

A general rule for central banks when deciding interest rates. The rule states that interest rates should be increased in times of high inflation and when employment is higher than full employment, and should be decreased in periods of low inflations and higher unemployment. The rule states that following these principles will encourage growth while discouraging inflation. The Federal Reserve follows this rule implicitly, even though it does not explicitly endorse it.
Mentioned in ?
References in periodicals archive ?
Set against Charles Taylor's rule of Liberia, Alexander Maksik's novel transmutes the bloody madness of civil war into the advancing disorientation of Jacqueline, a refugee attempting to find direction in the seaside resort on a Greek isle.
Glenn Rudebusch (1998) Taylor's Rule and Fed: 1970-1997.
Current monetary policy literature talks about the response of the federal funds rate to stabilize goal variables (inflation rate and GDP) often in the framework of Taylor's rule.
However, as pointed out earlier, while there has been a widespread support for Taylor's rule, we know of no systematic study showing whether the deviations of the federal funds rate from Taylor's rule were stabilizing or not.
This success seems remarkable because Taylor's rule is so simple: It is set according to only four components.
Under Taylor's rule, arms traffickers have prospered in Liberia, among them Gus Kouwenhoven, a Dutch national who runs the Hotel Africa outside Monrovia, and the notorious Victor Bout, a Russian broker based in the United Arab Emirates (see sidebar).
In my analysis, I modify Taylor's rule so that it can be analyzed through 1997 using data on the unemployment rate and the Consumer Price Index (CPI).
Just as Taylor's rule required additional assumptions, implementing an unemployment/CPI Taylor rule requires additional judgment.
By far the most pronounced such departure occurred during the early phases of the current expansion, in 1992 and 1993, when the Fed responded to the so-called "financial headwinds" buffeting the economy by holding short rates well below the levels that would have been prescribed by Taylor's rule.
Consequently, while Taylor's rule captures the broad contours of Fed policy, it is not particularly useful for explaining the precise timing and magnitude of policy actions.
Accordingly, the purpose of the present paper is to conduct counterfactual historical analysis of the type used by Stuart (1996) and Taylor (1999a), and to compare and consider the messages provided by Taylor's rule with others featuring alternative instrument and/or target variables.
If, however, the Fed is able to adopt a precise rule in the future, which is based on information everyone can observe - such as that employed in Taylor's rule - then there may well be a place for an interest rate term in the rule.