Taylor’s Rule versus Taylor Rules
27 Pages Posted: 2 May 2011 Last revised: 24 Sep 2012
Date Written: September 15, 2012
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: Suggested Citation