The Taylor Rule: Is It a Useful Guide to Understanding Monetary Policy?

FRB Richmond Economic Quarterly, Vol. 86, No. 2, Spring 2000, pp. 1-33

33 Pages Posted: 28 Nov 2012

See all articles by Robert L. Hetzel

Robert L. Hetzel

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 2000

Abstract

According to the Taylor rule, the Federal Reserve sets the funds rate based on an estimate of the economy’s unutilized resources and the contemporaneous behavior of inflation. The primary policy prescription deriving from this view is that the Fed has failed to control inflation when it has not responded vigorously enough to observed inflation. However, there are reasons to question this understanding of how the Fed controls inflation. If the Fed creates inflation, it is better to pursue a monetary policy that prevents inflation rather than responds to it.

Suggested Citation

Hetzel, Robert L., The Taylor Rule: Is It a Useful Guide to Understanding Monetary Policy? (2000). FRB Richmond Economic Quarterly, Vol. 86, No. 2, Spring 2000, pp. 1-33, Available at SSRN: https://ssrn.com/abstract=2126565

Robert L. Hetzel (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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