The Taylor Rule and the Practice of Central Banking

54 Pages Posted: 9 Jan 2011  

Pier Francesco Asso

University of Palermo

George A. Kahn

Federal Reserve Bank of Kansas City

Robert Leeson

affiliation not provided to SSRN

Date Written: February 16, 2010

Abstract

The Taylor rule has revolutionized the way many policymakers at central banks think about monetary policy. It has framed policy actions as a systematic response to incoming information about economic conditions, as opposed to a period-by-period optimization problem. It has emphasized the importance of adjusting policy rates more than one-for-one in response to an increase in inflation. And, various versions of the Taylor rule have been incorporated into macroeconomic models that are used at central banks to understand and forecast the economy.

This paper examines how the Taylor rule is used as an input in monetary policy deliberations and decision-making at central banks. The paper characterizes the policy environment at the time of the development of the Taylor rule and describes how and why the Taylor rule became integrated into policy discussions and, in some cases, the policy framework itself. Speeches by policymakers and transcripts and minutes of policy meetings are examined to explore the practical uses of the Taylor rule by central bankers. While many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, the paper shows that the rule has advanced the practice of central banking.

Keywords: Taylor rule, monetary policy, rules versus discretion

JEL Classification: B22, B31, E52

Suggested Citation

Asso, Pier Francesco and Kahn, George A. and Leeson, Robert, The Taylor Rule and the Practice of Central Banking (February 16, 2010). Available at SSRN: https://ssrn.com/abstract=1553978 or http://dx.doi.org/10.2139/ssrn.1553978

Pier Francesco Asso

University of Palermo ( email )

Viale delle Scienza
Palermo, Buenos Aires 90128
Italy

George A. Kahn (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
816-881-2436 (Phone)
816-881-2199 (Fax)

Robert Leeson

affiliation not provided to SSRN

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