Targeted Taylor rules: some evidence and theory by Cristina Manea

Join us for this week's Macroeconomics Research Seminar, Summer Term 2025.

Cristina Manea, from the Bank for International Settlements will present this week's Macroeconomics seminar on Targeted Taylor rules: some evidence and theory.

Abstract

Monetary theory prescribes a forceful reaction to demand--driven inflation and an attenuated response, if any, to supply--driven inflation. According to official communications, the U.S. Federal Reserve seeks to follow in practice a similar targeted approach to inflation. The Taylor--type rules used to describe its reaction function, however, do not account for this asymmetry and assume instead a uniform monetary policy response to inflation regardless of its drivers. In this paper, we refine existing monetary policy rules to allow for a different (targeted) reaction to demand-- versus supply--driven inflation. During the ``Great Moderation", baseline estimates of such a targeted Taylor rule for the U.S. show a fourfold larger response to demand--driven inflation than to supply--driven inflation. We introduce this new type of rule in the textbook New--Keynesian model to study its properties in terms of business cycle fluctuations and welfare.

This seminar will be held via zoom at 1.30pm on Tuesday, 29 April 2025. This event is open to all levels of study and is also open to the public. To register your place, please contact the seminar organisers.

This event is part of the Macroeconomics Research Seminar Series.