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Tag Archives: Taylor Rule

Arguments Against Strict Monetary Policy Rules

In its July 2017 Monetary Policy Report, the Board of Governors of the Federal Reserve System discusses monetary policy rules. On pp. 36–38, the Board argues that [t]he small number of variables involved in policy rules makes them easy to use. However, the U.S. economy is highly complex, and these rules, by their very nature, do not capture that complexity. … Another issue related to the implementation of rules involves the measurement of the variables that drive the prescriptions...

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Fiscal-Monetary Policy Interaction

In the Richmond Fed’s Econ Focus, Eric Leeper explains his views. Disparate confounding dynamics and simple policy rules: My view is that central banks have put far too many resources into understanding tiny fluctuations and too few resources into the things that actually matter. … Something like the basic Taylor rule doesn’t really serve as a useful litmus test for what policy is doing in the face of these DCDs, so it’s a little bizarre to me that a lot of central banks routinely calculate...

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Academic Skulduggery – How Ivory Tower Hubris Wrecks your Life

In the 1970s economists started to incorporate rational expectations into their models and not long after the seminal Kydand & Prescott (1977) article named Rules Rather than Discretion: The Inconsistency of Optimal Plan was published. Their work has been driving the mainstream macroeconomic debate ever since. The question raised in this debate is how policy-makers can credible commit to promises made today when future events may cause short-term pain if restricted by stringent rules...

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