Working Paper: NBER ID: w15908
Authors: John B. Taylor; John C. Williams
Abstract: This paper focuses on simple rules for monetary policy which central banks have used in various ways to guide their interest rate decisions. Such rules, which can be evaluated using simulation and optimization techniques, were first derived from research on empirical monetary models with rational expectations and sticky prices built in the 1970s and 1980s. During the past two decades substantial progress has been made in establishing that such rules are robust. They perform well with a variety of newer and more rigorous models and policy evaluation methods. Simple rules are also frequently more robust than fully optimal rules. Important progress has also been made in understanding how to adjust simple rules to deal with measurement error and expectations. Moreover, historical experience has shown that simple rules can work well in the real world in that macroeconomic performance has been better when central bank decisions were described by such rules. The recent financial crisis has not changed these conclusions, but it has stimulated important research on how policy rules should deal with asset bubbles and the zero bound on interest rates. Going forward the crisis has drawn attention to the importance of research on international monetary issues and on the implications of discretionary deviations from policy rules.
Keywords: monetary policy; simple rules; central banks
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| simple monetary policy rules (E52) | improved macroeconomic performance (E69) |
| central bank decisions aligned with simple rules (E61) | better macroeconomic performance (E65) |
| deviations from simple monetary policy rules (E49) | financial crisis (G01) |
| simple monetary policy rules (E52) | stabilization of inflation and output gaps (E63) |
| simple monetary policy rules are more robust than fully optimal rules (E61) | effectiveness in presence of measurement errors (C52) |