My starting point to characterizing the nature of monetary policy across countries is the standard Taylor rule
(1993), which specifies a link among nominal interest rates, inflation, and the output gap.
The 'Taylor Rule
,' named after the prominent economist John Brian Taylor of Stanford University and former US undersecretary of treasury for international affairs, is another guide to assessing the proper stance on monetary policy.
Monetary policymakers often use simple policy rules, like the Taylor rule
, as an input into their decision-making.
The Taylor rule
, under which the monetary authorities target the short-term policy rate so that it responds to divergences of actual inflation rates from target inflation rates, and to deviations of actual gross domestic product (GDP) from potential GDP, and Friedman's money-supply growth rule share several important attributes.
Section III.C discusses estimated impulse responses of key macroeconomic and financial variables to the structural shocks of the model and disentangles the stabilization properties of a credit-growth-augmented Taylor rule
. Section III.D presents the analysis of the variance decomposition to assess the importance of the exogenous structural shocks.
The Taylor rule
(proposed by the Stanford University economist John Taylor in the early 1990s) is often used to describe central banks' interest-rate policies.
In effect, the actual Bundesbank-ECB rate moved closely in tandem with the interest rate predicted by a Taylor rule
applied to Germany.
We find that monetary authority in Pakistan does not follow Taylor rule
as coefficient of output gap is negative and statistically insignificant and the coefficient of inflation rate, though statistically significant, is far below the benchmark value suggested by Taylor (1993).
This legislation requires the Fed to frame monetary policy using a mathematical formula--something akin to a Taylor rule
. Let me begin by noting that the Taylor rule
is heavily used in analysis at the Federal Reserve and plays an important role in thinking about how monetary policy should respond to changing economic circumstances.
For this purpose, we estimate several specifications of a Taylor rule
for monetary policy in Poland and use the estimates for calculation of ex-post interest rate path simulations to compare the actual interest rate with the scenario of no change in the central bank's preferences.
These changes also lead to similar movements in the inflation rate when the monetary policy follows the standard Taylor rule
, failing to recognize the time-varying nature of the natural rate of interest.
The analysis is based on a variant of the Taylor rule