Test of the Taylor Rule and Policy Implications

摘要

The Taylor rule [CRCSPP, 1993; MS, 1998; MPR, 2001] describes the behavior of the Fed in determining the federal funds rate and is given by: R = π + 0.5 GAP + 0.5(π - π~* )+R~* where R, π GAP, π~*, and R~* are the federal funds rate, the inflation rate, the output gap, the inflation target, and the real interest rate. Taylor assumed a 2% inflation target and a 2% real interest rate and suggested that the Fed would raise the federal funds rate by 0.5 percentage points if actual GDP is greater than potential GDP by 1.0 percentage point or if the inflation rate is greater than the inflation target by 1.0 percentage point.