Arbeitspapier
Taylor rules and the inflation surge: The case of the Fed
The Federal Reserve has been publishing federal funds rate prescriptions from Taylor rules in its Monetary Policy Report since 2017. The signals from the rules aligned with Fed action on many occasions, but in some cases the Fed opted for a different route. This paper reviews the implications of the rules during the coronavirus pandemic and the subsequent inflation surge and derives projections for the future. In 2020, the Fed took the negative prescribed rates, which were far below the effective lower bound on the nominal interest rate, as support for extensive and long-lasting quantitative easing. Yet, the calculations overstate the extent of the constraint, because they neglect the supply side effects of the pandemic. The paper proposes a simple model-based adjustment to the resource gap used by the rules for 2020. In 2021, the rules clearly signaled the need for tightening because of the rise of inflation, yet the Fed waited until spring 2022 to raise the federal funds rate. With the decline of inflation over the course of 2023, the rules' prescriptions have also come down. They fall below the actual federal funds rate target range in 2024. Several caveats concerning the projections of the interest rate prescriptions are discussed.
- Language
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Englisch
- Bibliographic citation
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Series: IMFS Working Paper Series ; No. 201
- Classification
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Wirtschaft
Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Interest Rates: Determination, Term Structure, and Effects
Monetary Policy
- Subject
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Monetary policy
interest rates
Federal Reserve
Taylor rule
New Keynesian macroepidemic models
- Event
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Geistige Schöpfung
- (who)
-
Tatar, Balint
Wieland, Volker
- Event
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Veröffentlichung
- (who)
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Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)
- (where)
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Frankfurt a. M.
- (when)
-
2024
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Tatar, Balint
- Wieland, Volker
- Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)
Time of origin
- 2024
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