A Simple Explanation of the Taylor Rule

Alessandro Piergallini and Giorgio Rodano

MPRA Paper from University Library of Munich, Germany

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.

Keywords: The Taylor rule; Optimal Monetary Policy; The Taylor Principle. (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2016-08-31
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Related works:
Journal Article: A Simple Explanation of the Taylor Rule (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:89082

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