What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules

This paper starts from the observation that most recent research on monetary-policy rules is restricted to consider a commitment to a simple instrument rule, where the central-bank instrument is a simple function of available information about the economy, like the Taylor rule. Alternatively, as pro...

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Bibliographic Details
Published in:Journal of economic literature 2003-06, Vol.41 (2), p.426-477
Main Author: Svensson, Lars E. O
Format: Article
Language:English
Subjects:
Analytical forecasting
Central banks
Economic models
Economic theory
Federal Reserve Bank
Inflation rates
Inflation targeting
Interest rates
Monetary policy
Output gaps
Studies
Taylor rule
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Summary:This paper starts from the observation that most recent research on monetary-policy rules is restricted to consider a commitment to a simple instrument rule, where the central-bank instrument is a simple function of available information about the economy, like the Taylor rule. Alternatively, as proposed by Taylor, for instance, in (1993, 2000), the proposed simple instrument rules are only to be used as guidelines and deviations from the rules are sometimes called for. The paper argues that a commitment to a simple instrument rule is inadequate as a description of current monetary policy, especially inflation targeting. Furthermore, it argues that the proposal to use simple instrument rules as mere guidelines is incomplete and too vague to be operational.
ISSN:0022-0515
2328-8175
DOI:10.1257/jel.41.2.426