Targeted Taylor rules: some evidence and theory

Boris Hofmann, Cristina Manea and Benoit Mojon

No 1234, BIS Working Papers from Bank for International Settlements

Abstract: The paper introduces the concept of a targeted Taylor rule defined as a monetary policy rule which allows for different responses to demand– and supply–driven inflation. This new concept tallies with Federal Reserve's monetary policy strategy as reflected in its official communications. When estimated for the United States using recent decompositions of inflation in demand and supply factors, this new type of rule points to an almost fourfold stronger monetary policy reaction to demand– than to supply–driven inflation starting with Paul Volker's Chairmanship. We show how to embed the new targeted rule into a textbook New-Keynesian model when the economy is simultaneously hit by demand and supply shocks, and discuss its implications for business cycle fluctuations and welfare.

Keywords: monetary policy trade–offs; targeted Taylor rules; inflation targeting (search for similar items in EconPapers)
JEL-codes: E12 E3 E52 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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