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Revisiting the Taylor Rule: Insights on Federal Monetary Policy and Economic Recovery

This analysis explores the Taylor Rule's relevance in modern monetary policy and the Federal Reserve’s historical performance. By examining how the target federal funds rate is influenced by inflation rates and GDP deviations, we assess the impact of stimulus measures like TARP on the economy. We discuss the lingering effects of extensive liquidity and counterparty credit risks, alongside a significant rise in excess reserves since the financial crisis. Finally, we provide insights into how these factors might shape future policy decisions going forward.

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Revisiting the Taylor Rule: Insights on Federal Monetary Policy and Economic Recovery

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Presentation Transcript

  1. TaylorGetting Back on Track

  2. Great Moderation

  3. The Taylor Rule and Fed’s Track Record (Cont.) • Taylor rule • Federal funds rate target is a function of: • The difference between actual inflate rate (INFL) and the target inflation (INFL*) • The percentage difference between actual and potential real GDP (GAP)

  4. Deviation from Taylor Rule

  5. Liquidity or Counterparty Credit Risk Problem?

  6. Impact of Stimulus (Round 1)

  7. Did TARP Help?

  8. Did TARP Help?

  9. Impact of Stimulus (Round 2)

  10. Likely LR Impact of Stimulus

  11. Likely LR Impact of Stimulus

  12. Monetary Policy Implications Average excess reserves since advent of financial crisis exceed 500 times pre-crisis average.

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