How Useful Are Taylor Rules for Monetary Policy?

O ver the past several years, Taylor rules have attracted increased attention of analysts, policymakers, and the financial press. Taylor rules recommend a setting for the level of the federal funds rate based on the state of the economy. For instance, they may recommend raising the federal funds rate when inflation is above target or lowering the federal funds rate when a recession appears to be more of a threat. Taylor rules have become more appealing recently with the apparent breakdown in the relationship between money growth and inflation (Blinder). But, while Taylor rules have attracted considerable interest, the usefulness of rule recommendations to policymakers has not been well established.