Taylor’s Rule versus Taylor Rules

27 Pages Posted: 2 May 2011 Last revised: 24 Sep 2012

See all articles by Alex Nikolsko‐Rzhevskyy

Alex Nikolsko‐Rzhevskyy

Lehigh University - Business School

David H. Papell

University of Houston - Department of Economics

Date Written: September 15, 2012

Abstract

Does the Taylor rule prescribe negative interest rates for 2009-2011? This question is important because negative prescribed interest rates provide a justification for quantitative easing once actual policy rates hit the zero lower bound. We answer the question by analyzing Fed policy following the recessions of the early-to-mid 1970s, the early 1990s, and the early 2000s in the context of both Taylor’s original rule and latter variants of Taylor rules. While Taylor’s original rule, which can be justified by historical experience during and following the recessions, does not produce negative prescribed interest rates for 2009-2011, variants of Taylor rules with larger output gap coefficients, which do produce negative interest rates, cannot be justified by the same historical experience. We conclude that the Taylor rule does not provide a rationale for quantitative easing.

Keywords: Taylor rule, monetary rules, recession, quantitative easing

JEL Classification: E47, E52, E58

Suggested Citation

Nikolsko-Rzhevskyy, Alex and Papell, David H., Taylor’s Rule versus Taylor Rules (September 15, 2012). Available at SSRN: https://ssrn.com/abstract=1826363 or http://dx.doi.org/10.2139/ssrn.1826363

Alex Nikolsko-Rzhevskyy

Lehigh University - Business School ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

HOME PAGE: http://www.nikolsko-rzhevskyy.com

David H. Papell (Contact Author)

University of Houston - Department of Economics ( email )

Houston, TX 77204-5882
United States