An empirical investigation of the Taylor curve

Eric Olson (), Walter Enders and Mark Wohar ()

Journal of Macroeconomics, 2012, vol. 34, issue 2, 380-390

Abstract: Taylor (1979) posited that a central bank faces a tradeoff between the volatility of the output gap and volatility of inflation; this trade-off has become known as the Taylor curve. Thus, the Taylor curve necessitates that the correlation between the volatilities of inflation and the output gap be non-positive for optimal monetary policy. Friedman (2006) challenged Chatterjee (2002) and Taylor’s (2006) view that the Taylor curve may be used as a policy menu from which the central bank may choose the level of inflation and output gap volatilities. To better understand the issue, we take an in depth look at the correlation between the second moments of inflation and the output gap through the lens of the Taylor curve. Our results reveal that macroeconomic performance is superior in time periods in which the Taylor curve relationship holds.

Keywords: Monetary policy; Taylor rule; Time-varying parameters; Inflation targeting (search for similar items in EconPapers)
JEL-codes: C32 E31 E58 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070411000887
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:34:y:2012:i:2:p:380-390

DOI: 10.1016/j.jmacro.2011.12.005

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().