How effective is the Taylor rule? Some insights from the time-frequency domain

Bericht

When the central bank sets monetary policy according to a conventional or modified Taylor rule (which is known as the Taylor Principle), does this deliver the best outcome for the mac-roeconomy as a whole? This question is addressed by extending the wavelet-based control (WBC) model of Crowley and Hudgins (2015) to evaluate macroeconomic performance when the central bank sets interest rates based on a conventional or modified Taylor rule (TR). We compare the simulated performance of jointly optimal fiscal and monetary policy under an unrestricted baseline model with performance under the TR. We simulate the model un-der relatively small and large weighting of the output gap in the TR specification, and for both low and high inflation environments. The results show that the macroeconomic outcome de-pends on whether the conventional or modified Taylor rule is used, and whether the central bank is operating in a low or high inflation environment.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BoF Economics Review ; No. 1/2020

Classification and Topics

• Classification: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Computational Techniques; Simulation Modeling ; Data Collection and Data Estimation Methodology; Computer Programs: Other Computer Software ; Monetary Policy ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation: Models and Applications
• Subject: Discrete Wavelet Analysis ; Monetary Policy ; Optimal Control

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Crowley, Patrick M. ; Hudgins, David
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/214875
• URN: urn:nbn:fi:bof-202002192000
• Last update: 10.03.2025, 11:44 AM CET