The Taylor Rule and its Aftermath: An Interpretation Along Classical-Keynesian Lines

Enrico Sergio Levrero

Review of Political Economy, 2024, vol. 36, issue 2, 581-599

Abstract: The aim of this paper is to assess to what extent the Taylor rule can be considered an appropriate representation of the tendency of central banks to react to inflation. After an overview of the origin and use of the Taylor rule, the paper stresses some difficulties in its implementation and the limits of its interpretation by the New Consensus models. Specifically, the inherent difficulties stemming from the notion and estimates of a benchmark interest rate determined by ‘productivity and thrift’ are pointed out. We then move on to advance an alternative interpretation of the Taylor rule along Classical-Keynesian lines. In this context, inflation is fuelled by conflicting claims on income distribution and the rule will be interpreted, as it is in actual fact, as a flexible and non-mechanical benchmark for monetary policies which will be seen to affect the division of product between wages and profits.

Date: 2024
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DOI: 10.1080/09538259.2023.2166729

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