Monetary Policy in the Presence of Term Structure Effects

Felix Geiger

Chapter Chapter 6 in The Yield Curve and Financial Risk Premia, 2011, pp 159-193 from Springer

Abstract: Abstract In macroeconomics, the short-term interest rate is usually modeled as a monetary-policy reaction function to a set of macroeconomic variables. A deliberately simple functional form is the Taylor rule; it is the answer to a perennial question in monetary economics of how the monetary authority should implement policy in a systematic manner. Taylor (1993, 214) developed a “hypothetical but representative” rule by using the gap concept of inflation and output. The Taylor rate is 1.5 times inflation plus 0.5 times the output gap, plus 1. For the period between 1982 and 1992, the rule was successful in capturing the actual behavior of the US federal funds rate. As this period is widely regarded as a shift from a “passive” to an “active” stabilizing monetary policy regime, the rule has been used ever since to ask where monetary policy should head in response to fluctuations in inflation and real activity.

Keywords: Interest Rate; Monetary Policy; Central Bank; Euro Area; Real Interest Rate (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-642-21575-9_6

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DOI: 10.1007/978-3-642-21575-9_6

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