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A Simple Explanation of the Taylor Rule

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  • Piergallini, Alessandro
  • Rodano, Giorgio

Abstract

The modern New Keynesian literature discusses the stabilizing properties of Taylor-type interest rate rules mainly in the context of complex optimizing models. In this paper we present a simple alternative approach to provide a theoretical rationale for the adoption of the Taylor rule by central banks. We find that the Taylor rule can be derived as the optimal interest rate rule in a classical Barro-Gordon macroeconomic model. The successful practice of central bankers, at the core of the Great Moderation, and currently re-invoked to re-normalize monetary policy after the unprecedented quantitative-easing actions aimed to escape the Great Recession, can perfectly be explained by standard theory, without recourse to more complicated derivations.

Suggested Citation

  • Piergallini, Alessandro & Rodano, Giorgio, 2016. "A Simple Explanation of the Taylor Rule," MPRA Paper 89082, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89082
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    References listed on IDEAS

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    Cited by:

    1. K. Mukherjee & B. Ouattara, 2021. "Climate and monetary policy: do temperature shocks lead to inflationary pressures?," Climatic Change, Springer, vol. 167(3), pages 1-21, August.

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    More about this item

    Keywords

    The Taylor rule; Optimal Monetary Policy; The Taylor Principle.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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