Optimal Monetary Policy and Taylor Rule Extensions

Blampied, Nicolas and Cafferata, Alessia and Tibiletti, Luisa and Uberti, Mariacristina (2024): Optimal Monetary Policy and Taylor Rule Extensions.

Abstract

The Taylor rule constitutes the main tool policy makers rely on to guide monetary policy. In simple words, the rule is a reaction function that determines the short-term interest rate, which responds in the baseline specifications to changes in the inflation gap and the output gap. Since the original paper of Taylor (1993), a large debate has taken place in the literature regarding what the best performing rules are. This paper attempts to analyze the recent literature on the Taylor rule and in particular two important extensions proposed in the last decades: first, we consider whether financial variables should be included in the Taylor rule; second, we analyze the inclusion of the long-term interest rate. From this analysis, we contribute to the understanding of the main monetary policy tool used by any Central Bank and debate whether we find potential variables to extend it.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation; Interest rates; Output;Taylor rule; Taylor principle
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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