The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules

John Taylor

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: This paper shows that different models of the monetary transmission mechanism lead to surprisingly similar choices about monetary policy rules. In particular, simple rules in which the interest rate reacts to inflation and real output seem to be robust to many different views about how monetary policy works. In models of small open economies—where the monetary transmission mechanism has a relatively strong exchange rate channel—the policy rule should also adjust to the exchange rate, but the gains from such exchange rate rules over rules that react only to inflation and output are small. The results suggest the need for more research on both the effect of exchange rate fluctuations and on policy rules that take account of exchange rates.

Date: 2000-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-pke
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Citations: View citations in EconPapers (9)

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Chapter: The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:87

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