Rules Versus Discretion: Assessing the Debate Over the Conduct of Monetary Policy

Taylor, John B.

doi:10.3386/w24149

Cited by 24 publications

(12 citation statements)

References 35 publications

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“…Translating interests is at once offering new interpretations of these interests and channeling people in other directions. (Latour (1987), p. [116][117] In the Harry Johnson lecture at the Money Macro and Finance Research Group conference in Durham, September 1997, Taylor (1998) defines "translational economics" in a more narrow sense than Latour (1987):…”

Section: Propositionmentioning

confidence: 99%

How macroeconomists lost control of stabilization policy: towards dark ages

Chatelain¹,

Ralf²

2020

The European Journal of the History of Economic Thought

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This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilization policy from 1948 to 1975 and the subsequent break of the use of control for stabilization policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favored their support of rules against discretionary stabilization policy. The Lucas critique and Kydland and Prescott's time-inconsistency were overstatements that led to the "dark ages" of the prevalence of the stabilizationpolicy-ineffectiveness idea. These overstatements were later revised following the success of the Taylor (1993) rule.

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Section: Propositionmentioning

confidence: 99%

How macroeconomists lost control of stabilization policy: towards dark ages

Chatelain¹,

Ralf²

2020

The European Journal of the History of Economic Thought

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“…Taylor (1993) stipulates that the central bank regulates the short-run interest rate in response to changes in the inflation rate and the output gap (interest rate reaction function). This has become a monetary policy rule which the Federal Reserve (Fed) and other central banks have incorporated into their decision making (Taylor 2018). The Taylor rule principle is used in this study due to its effectiveness in monetary policy.…”

Section: Introductionmentioning

confidence: 99%

Application of Taylor Rule Fundamentals in Forecasting Exchange Rates

Agyapong¹

2021

Economies

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This paper examines the effectiveness of the Taylor rule in contemporary times by investigating the exchange rate forecastability of selected four Organisation for Economic Co-operation and Development (OECD) member countries vis-à-vis the U.S. It employs various Taylor rule models with a non-drift random walk using monthly data from 1995 to 2019. The efficacy of the model is demonstrated by analyzing the pre- and post-financial crisis periods for forecasting exchange rates. The out-of-sample forecast results reveal that the best performing model is the symmetric model with no interest rate smoothing, heterogeneous coefficients and a constant. In particular, the results show that for the pre-financial crisis period, the Taylor rule was effective. However, the post-financial crisis period shows that the Taylor rule is ineffective in forecasting exchange rates. In addition, the sensitivity analysis suggests that a small window size outperforms a larger window size.

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“…In this paper, we consider the rule as an input in the FXI decision without discussing what weight should be given to the rule compared with policy maker judgement. The objective of paper is more to help central bank in developing tools for FXI than to contribute to the rule versus discretion literature (Barro andGourdon 1983 andTaylor 2017).…”

Section: Introductionmentioning

confidence: 99%

Foreign Exchange Intervention Rules for Central Banks

Lafarguette¹,

Veyrune²

2021

IMF Working Papers

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This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

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Rules Versus Discretion: Assessing the Debate Over the Conduct of Monetary Policy

Cited by 24 publications

References 35 publications

How macroeconomists lost control of stabilization policy: towards dark ages

How macroeconomists lost control of stabilization policy: towards dark ages

Application of Taylor Rule Fundamentals in Forecasting Exchange Rates

Foreign Exchange Intervention Rules for Central Banks

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