Working Paper: NBER ID: w13685
Authors: John B. Taylor
Abstract: This paper shows that the theory of monetary policy rules is able to explain, predict, and help understand a variety of phenomenon in macroeconomics and finance, including the Great Moderation, the correlation between exchange rates and interest rates, and the shift in the response of the term structure of interest rates to inflation and output. Although the theory was originally designed for normative reasons, it has turned out to have positive implications which validate it scientifically. And while initially focused on the United States, it has applied equally well in other countries.
Keywords: No keywords provided
JEL Codes: E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Responsiveness of interest rates to inflation (E43) | Lower volatility in inflation (E31) |
| Responsiveness of interest rates to GDP (E43) | Lower volatility in GDP (E39) |
| Adoption of monetary policy rules (E61) | Greater economic stability (P19) |
| Increased responsiveness of policy to inflation and output (E63) | More stable economic outcomes (P17) |
| Monetary policy rules (E52) | Accurate prediction of future interest rates (E47) |
| Actual path of the federal funds rate (E43) | Predictions made by monetary policy rules (E47) |
| Shift in monetary policy rules (E52) | Change in interest rates response to inflation and GDP (E43) |
| Increased responsiveness of interest rates (E43) | Improved macroeconomic performance (E69) |
| Rising inflation (E31) | Appreciation of the dollar (F31) |
| Fed's response under policy rules (E52) | Appreciation of the dollar (F31) |