According to Goodhart’s speech in 1998, the key decision that the monetary authorities take each month is whether, and by how much, to alter the shortterm interest rate. As central banks vary interest rates in response to economic development the crucial question has become how they should adjust it in order to achieve, or to come as close as possible to, the social welfare optimum. The vital importance of this decision for the financial community and therefore the economies in general could be observed in the public discussion which frequently occurs about how the Fed and the ECB should react by changing the short term interest rates.
A popular way of explaining the way central banks take its interest rate decisions has been proposed by Taylor in 1993. He basically suggested a rule, which he derived from observation of former successful monetary policy. This essay shows how the Taylor rule works and to which extent major central banks have been following the rule.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Why do we need Simple Monetary Policy Rules?
- Economic Principles
- Advantages of Simple Monetary Policy Rules
- The Taylor rule
- To which extent have modern central banks been following Taylor Rules?
- Monetary Policy in Japan, the U.S. and in Germany
- Monetary Policy in the U.K.
- Conclusion
- References
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This essay explores the rationale behind the Taylor rule in monetary policy and analyzes the extent to which modern central banks in major countries have adhered to this rule. The author aims to provide a clear understanding of the Taylor rule's operation and its effectiveness in guiding interest rate decisions.
- The rationale for simple monetary policy rules
- The Taylor rule and its underlying principles
- The application of the Taylor rule by major central banks
- The effectiveness of the Taylor rule in promoting economic stability
- The importance of central bank responses to inflation shocks
Zusammenfassung der Kapitel (Chapter Summaries)
The introductory chapter explores the need for simple monetary policy rules, emphasizing their role in stabilizing the economy and reducing inflationary pressures. It outlines the key economic principles underpinning the Taylor rule, highlighting the importance of inflation targets and the need for appropriate responses to economic shocks.
The second chapter delves into the Taylor rule itself, outlining its structure and its derivation from observed patterns in successful monetary policy. It discusses the rule's advantages, including its ability to reduce time inconsistency and provide clarity for the public.
The final chapter examines the application of the Taylor rule by major central banks in recent decades, focusing on the experiences of Japan, the United States, Germany, and the United Kingdom. It explores the extent to which these central banks have followed the Taylor rule's guidelines and assesses the rule's effectiveness in achieving economic stability.
Schlüsselwörter (Keywords)
The key concepts and terms explored in this essay include monetary policy rules, the Taylor rule, inflation targets, economic shocks, interest rate decisions, central banks, economic stability, time inconsistency, and inflation.
- Quote paper
- Dipl. Kfm. Kristian Kanthak (Author), 2002, Explain carefully the rationale for the Taylor rule in monetary policy and discuss the extent to which modern central banks in major countries have been following Taylor rules, Munich, GRIN Verlag, https://www.grin.com/document/10100