Taylor rules and the Great Inflation

Taylor rules with headline inflation : A bad idea

Should a central bank accommodate energy price shocks? Should the central bank use core inflation or headline inflation with the volatile energy component in its Taylor rule? To answer these questions, we build a dynamic stochastic general equilibrium model with energy use, durable goods, and nominal rigidities to study the effects of an energy price shock and its impact on the macroeconomy whe...

Monetary Policy and the Great Inflation: A Multi-Country Time-Varying Analysis Using the Taylor Rule

This paper is motivated by the observation that the Great Inflation, i.e., the high and volatile inflation that developed in the mid 1960s and lasted for almost twenty years, was an international phenomenon. Given that observation, we argue that an explanation for the Great Inflation should be consistent with the timing of the events in many developed countries, and not only with the US. We pro...

Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?

The Perils of Taylor Rules

Since John Taylor’s (1993) seminal paper, a large literature has argued that active interest rate feedback rules, that is, rules that respond to increases in inflation with a more than one-for-one increase in the nominal interest rate, are stabilizing. In this paper, we argue that once the zero bound on nominal interest rates is taken into account, active interest-rate feedback rules can easily...

Tinbergen rules the Taylor Rule

Tinbergen Rules the Taylor Rule by Thomas R. Michl JEL E12, E52