!! Cancelled !!

Cristina Manea

(Bank for International Settlements)

will give a presentation on 

Targeted Taylor rules: some evidence and theory

Abstract

Conditional on long-run inflation expectations remaining anchored, monetary theory prescribes a forceful reaction to demand-driven inflation and an attenuated response, if any, to supply-driven inflation. According to official communications, the U.S. Federal Reserve seeks to follow in practice a similar targeted approach to inflation. The Taylor rules used to describe its reaction function, however, do not account for this asymmetry and assume instead a uniform monetary policy response to inflation regardless of its drivers. In this paper, we refine existing monetary policy rules to allow for a different (targeted) reaction to demand- versus supply-driven inflation. During the ``Great Moderation", baseline estimates of such a targeted Taylor rule for the U.S. show a fourfold larger response to demand-driven inflation than to supply-driven inflation. We use a textbook New-Keynesian model to discuss the properties of this new type of rule in terms of business cycle fluctuations and welfare.

(joint with B Hofmann (BIS) and B Mojon (BIS))