Inertial Taylor Rules: The Benefit of Signaling Future Policy

16 Pages Posted: 28 Oct 2007

See all articles by Charles T. Carlstrom

Charles T. Carlstrom

Federal Reserve Bank of Cleveland

Timothy S. Fuerst

University of Notre Dame

Date Written: April 2007

Abstract

We trace the consequences of an energy shock on the economy under two different monetary policy rules: a standard Taylor rule where the Fed responds to inflation and the output gap; and a Taylor rule with inertia where the Fed moves slowly to the rate predicted by the standard rule. We show that with both sticky wages and sticky prices, the outcome of an inertial Taylor rule is superior to that of the standard rule, in the sense that inflation is lower and output is higher following an adverse energy shock. However, if prices alone are sticky, things are less clear and the standard rule delivers substantially less inflation than the inertial rule in the short run.

Suggested Citation

Carlstrom, Charles T. and Fuerst, Timothy S., Inertial Taylor Rules: The Benefit of Signaling Future Policy (April 2007). FRB of Cleveland Policy Discussion Paper No. 17, Available at SSRN: https://ssrn.com/abstract=1024828 or http://dx.doi.org/10.2139/ssrn.1024828

Charles T. Carlstrom (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States
216-579-2294 (Phone)
216-579-3050 (Fax)

Timothy S. Fuerst

University of Notre Dame ( email )

Notre Dame, IN 46556
United States

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