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Targeted Taylor rules: some evidence and theory

Author

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  • Boris Hofmann
  • Cristina Manea
  • Benoit Mojon

Abstract

Monetary theory and central bank doctrine generally prescribe a forceful reaction to demand-driven inflation and an attenuated response, if any, to supply-driven inflation. The Taylor–type rules used so far to describe central banks' reaction functions assume instead a uniform response of policy rates to inflation irrespective of its drivers. In this paper, we refine the specification of these policy rules to allow for a different (targeted) reaction to demand- versus supply-driven inflation. Estimates of the new targeted rule for the United States show a fourfold larger response to demand-driven inflation than to supply-driven inflation. We use a textbook New Keynesian model to discuss the properties of the new type of monetary policy rule in terms of business cycle fluctuations and welfare.

Suggested Citation

  • Boris Hofmann & Cristina Manea & Benoit Mojon, "undated". "Targeted Taylor rules: some evidence and theory," BIS Working Papers 1234, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1234
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    More about this item

    Keywords

    monetary policy trade–offs; targeted Taylor rules; inflation targeting;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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