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2 Structural Uncertainty and the Taylor Rule 2.1 Taylor Rule Specifications The rule reported in Taylor (1993) relates the federal funds rate in time t, rt, to the rate of change of the implicit output deflator over the previous four quarters, πt,andameasure of the output gap at t, xt, as follows: rt = γ0 +γππt+γxT+1xt+εt,(2.1) In our application, we determine the feedback rules for taxes on capital income and labor income. The central banks attempt to achieve the new target rate by using the tools of monetary policy, mainly the open market operations. Introduced by Stanford economist John Taylor in 1993, the rule has become extremely popular. 2.1 Monetary policy in Norway The central bank in Norway, Norges Bank, has since 1985, when the law This is the view expressed by Taylor, for instance in Taylor (1993) and, in more detail, in Taylor (2000). Taylor's rule was invented and published from 1992 to 1993 by John Taylor, a Stanford economist, who outlined the rule in his precedent-setting 1993 study "Discretion vs. Policy Rules in … Second, incorporation of a Taylor rule requires switching to a non-accelerationist Phillips curve, which is different from LW. 2 Nelson, Edward 2000. The Taylor Rule. Using the Greenbook inflation forecasts and the real-time output gap, the estimated policy rule predicts very well the actual path of the federal funds rate over 1987 to 2000. Macroeconomists have long been interested in modeling the Federal Reserve’s “reaction function”—that is, model-ing how the Fed alters monetary policy in response to eco-nomic developments. Instead, the instrument rules should be seen as mere “guidelines” for monetary policy. At the ZLB, such a Taylor rule would set the nominal inter-est rate to zero until the optimal exit date; thereafter the nominal interest rate is determined by the first-order conditions for opti- Taylor rule fundamentals, which may provide a resolution for the exchange rate disconnect puzzle. This assumption, based on the idea The Taylor rule is often thought of as a good approximation. Whilst the Taylor rule has reached widespread fame and popularity it has lately been questioned. He finds that a very simple rule does a good job of describing Federal Reserve interest-rate decisions, particularly since 1982. rules proposed should not be followed mechanically. Discretion versus policy rules in practice John B. Taylor* Stanford University, Stanford, CA 94905 Abstract This paper examines how recent econometric policy evaluation research on monetary policy rules can be applied in a practical policymaking environment. 2.1 Real-time, forward-looking Taylor rules The Taylor Rule (named for John Taylor, a macroeconomist at Stanford) is a particular example of a “cen-tral bank reaction function”—that is, a function or rule according to which the central bank sets its policy instrument as a reasonably predictable response to the state of the economy. Rate by using the tools of monetary policy by the world’s most advanced central attempt... Fame and popularity it has lately been questioned attempt to achieve the new target rate by the... Summary of the interest rate to movements in inflation is well described by the world’s most advanced banks. A more than 1:1 reaction to changes in actual inflation is a reaction function linking movements in variables. 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