Targeted Taylor rules: some evidence and theory

Boris Hofmann, Cristina Manea and Benoit Mojon

No 1234, BIS Working Papers from Bank for International Settlements

Abstract: Monetary theory and central bank doctrine generally prescribe a forceful reaction to demand-driven inflation and an attenuated response, if any, to supply-driven inflation. The Taylor–type rules used so far to describe central banks' reaction functions assume instead a uniform response of policy rates to inflation irrespective of its drivers. In this paper, we refine the specification of these policy rules to allow for a different (targeted) reaction to demand- versus supply-driven inflation. Estimates of the new targeted rule for the United States show a fourfold larger response to demand-driven inflation than to supply-driven inflation. We use a textbook New Keynesian model to discuss the properties of the new type of monetary policy rule in terms of business cycle fluctuations and welfare.

Keywords: monetary policy trade–offs; targeted Taylor rules; inflation targeting (search for similar items in EconPapers)
JEL-codes: E12 E3 E52 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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