Beyond the Taylor Rule

Emi Nakamura, Venance Riblier

The Taylor rule fit reasonably well between 1987 and 2008, but hasn’t fit well since. Countries with relatively poor credibility of monetary policy raised rates more after Covid but experienced more inflation. Countries with more credibility were able to look through the post-Covid inflation to a greater extent. It is optimal for central banks with strong credibility to partly look through supply shocks. Concerns about indeterminacy are overblown.