Wednesday, January 16, 2008

Development of the Taylor Rule

Those of you interested in macroeconomics in general and monetary policy in particular should find this of interest. I especially recommend it to those of you participating in the Fed Challenge competition that is offered in several Federal Reserve Districts.

The Federal Reserve Bank of Kansas City just posted an interesting paper on the historical development of the Taylor Rule and its impact on monetary policy. First proposed by John Taylor, currently Professor of Economics at Stanford University, the Taylor Rule suggests that the Fed Funds rate can be explained using an equation, based on the recent rate of inflation and the difference between real Gross Domestic Product (GDP) and trend.

Don't be scared off because the equation may be beyond you and your students. (It has been for me in the past - I think I'm starting to get it.) It is the tracing of the intellectual roots in this paper that has helped me better understand where the theory comes from and how it came to be fleshed out. Linking the idea to the early work of Simons, Keynes, Phillips, Friedman and others was interesting and helpful in solidifying my grasp of Taylor's work and its importance.

I would recommend it, and I hope to read your thoughts on the article.

1 comment:

Mike Fladlien said...

in ben bernanke and robert franks macro book they explain the taylor rule so that i can understand it...as usual, you've given me some excellent information to read...according to my text, the taylor rule accurately described the fed's reaction function under greenspan....interesting, that inflation targeting...