A Simple Explanation of the Taylor Rule

Alessandro Piergallini and G Rodano

Economic Issues Journal Articles, 2017, vol. 22, issue 1, 25-35

Abstract: The modern New Keynesian literature discusses the stabilising properties of Taylor-type interest rate rules mainly in the context of complex optimising 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-normalise 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.

Date: 2017
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Working Paper: A Simple Explanation of the Taylor Rule (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eis:articl:117piergallini

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