Taylor Rule - Empirical Relevance

Empirical Relevance

Although the Federal Reserve does not explicitly follow the Taylor rule, many analysts have argued that the rule provides a fairly accurate summary of US monetary policy under Paul Volcker and Alan Greenspan. Similar observations have been made about central banks in other developed economies, both in countries like Canada and New Zealand that have officially adopted inflation targeting rules, and in others like Germany where the Bundesbank's policy did not officially target the inflation rate. This observation has been cited by Clarida, Galí, and Gertler as a reason why inflation had remained under control and the economy had been relatively stable (the so-called 'Great Moderation') in most developed countries from the 1980s through the 2000s. However, according to Taylor, the rule was not followed in part of the 2000s, possibly leading to the housing bubble. Certain research has determined that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules.