What would Taylor do?

Économiste Monétaire

I've seen various discussions on what a Taylor rule would imply for Ireland, so I thought some people might be interested in this. There are numerous variants on John Taylor's monetary policy rule, but if we use Taylor's original form:

[latex] \displaystyle i = r + \beta_{\pi}(\pi - \pi^{*}) + \beta_{y} (y - y_{p}) [/latex]

where i is the interest rate, r is the equilibrium rate, pi is the inflation rate, pi* is the target on inflation, y is (the log of) real GDP, and y_p is 'potential output'.

For Ireland, using Taylor's original estimates for the above coefficients,



An implied central bank rate of -11% for Q2 of this year :pac:.

Time Magazine

Standard macro policy suggestion is something that has never been tried before and is completely impossible in the real world? Never!

Économiste Monétaire

Get away with your reality 'n stuff. I'm surprised you didn't chip in a remark about measuring potential GDP :P.

Économiste Monétaire

Here's another for the Euro area and Germany,



Solid lines use the same method for approximating potential GDP as above, the dashed lines use a HP filter. The orange line is the actual ECB rate.