Premium
Taylor's Rule Versus Taylor Rules
Author(s) -
NikolskoRzhevskyy Alex,
Papell David H.
Publication year - 2013
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/j.1468-2362.2013.12024.x
Subject(s) - taylor rule , economics , output gap , interest rate , recession , monetary policy , context (archaeology) , zero lower bound , keynesian economics , nominal interest rate , taylor series , econometrics , macroeconomics , real interest rate , mathematics , central bank , history , mathematical analysis , archaeology
Abstract Does the Taylor rule prescribe negative interest rates for 2009–11? This question is important because negative prescribed interest rates provide a justification for quantitative easing once actual policy rates hit the zero lower bound. We answer the question by analyzing Fed policy following the recessions of the early‐to‐mid‐1970s, the early 1990s and the early 2000s, in the context of both Taylor's original rule and latter variants of Taylor rules. While Taylor's original rule, which can be justified by historical experience during and following the recessions, does not produce negative prescribed interest rates for 2009–11, variants of Taylor rules with larger output gap coefficients, which do produce negative interest rates, cannot be justified by the same historical experience. We conclude that the Taylor rule does not provide a rationale for quantitative easing.