Monetary Policy The Taylor Rule.ppt英文电子资料.pdf

The Taylor Rule and Its Variants History of the Taylor Rule • Taylor (1993)* proposes a “feedback” monetary policy rule, where changes in policy instruments (e.g., the interest rate, the monetary base, the money supply) responds to changes in the price level or real income. • He argues that using rules to to control inflation is more effective than discretionary policy • Although different studies have shown different responsiveness of the instruments, there has been some indication of the functional forms and the signs of the coefficients. • Under discretion policy, the settings of the instruments are determined from scratch each period -- which may result in time-inconsistency problem. *Taylor, J.B., 1993. Discretion Versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy 39, 195-214. 1 Discretion v. Rules • A policy rule is referred to as the “optimal,” the “rules,” or the “precommitted” solution, to a dynamic optimisation problem. • Discretionary policy is referred to as the “inconsistent,” the “cheating,” or the “shortsighted” solution. • The difference and the advantage of rules over discretion are like those of a cooperative over a noncooperative solution in game theory. Taylor Rule: Functional Form • Taylor (1993) claims that policy rules that seem to work well focus on the price level and real output directly. • Rules that focus on exchange rate or the money supply do not deliver as good a performance, which is measure by the variances of output and price. • Taylor (1993) finds that placing a positive weight on both the price level and real output is the interest-rate rule is preferable in most of his samples. • He proposes a simple feedback rule where the weight