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Taylor Rule. A Bayesian Interpretation of the Federal Reserve’s Dual Mandate

In: Economics Gone Astray

Author

Listed:
  • Blu Putnam
  • Samantha Azzarello

Abstract

After the Panic of 1907, the US Congress moved to establish a central bank with the powers to serve as a lender of last resort and prevent runs on banks turning into full-fledged financial crises. The Federal Reserve came into being in 1913, and its charter mandated that the new central bank “promote an elastic currency.” The term “elastic” in the opening words of the charter was intended to underscore the need for a robust banking system that could withstand shocks and not collapse upon itself. There was no mention whatsoever of a dual mandate of promoting price stability and encouraging full employment. The dual mandate concept emerged after World War II, as the US Congress reflected on the Federal Reserve’s near total abrogation of its assigned duties in the 1930s with its failure to serve as a lender of last resort as had been intended…

Suggested Citation

  • Blu Putnam & Samantha Azzarello, 2019. "Taylor Rule. A Bayesian Interpretation of the Federal Reserve’s Dual Mandate," World Scientific Book Chapters, in: Economics Gone Astray, chapter 16, pages 219-242, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9781944659592_0016
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    More about this item

    Keywords

    Economics; Macroeconomics; Monetary Policy; Fiscal Policy; Inflation; Risk Management; Federal Reserve; Quantitative Easing; Taylor Rule;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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