Mr. Taylor and the Central Bank: Two Inference Exercises

February 15, 2019

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Format: Chicago

Francesco Luna. Mr. Taylor and the Central Bank: Two Inference Exercises, (USA: International Monetary Fund, 2019) accessed December 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Many observers argue that the world has changed after the latest financial crisis. If that is the case, monetary policy and the process informing it will have to be reconsidered and “learned” anew by all stakeholders. Perhaps, a new Taylor rule will emerge. A “Taylor rule” is predicated upon two successful inference exercises: one by the researcher who is interested in identifying the Central Bank’s behavior and one by the Central Bank, which tries to infer how the economy works and interacts with its monetary policy interventions. Because of certain granularities imposed by institutional arrangements and the need for transparent communication in policy making, this paper proposes an analytical framework based on computability theory to model these inference exercises and to assess their general possibility of success. So, is it possible to infer/learn the central bank’s policy rule? The answer is a qualified positive and depends on the “complexity” of the economy and on the quality of information. As for policy implications, the results show that transparency and understandable “reaction functions” will go a long way in fostering learnability.

Subject: Banking, Central bank policy rate, Inflation targeting

Keywords: Central bank, Monetary policy, Policy rule, Rule, WP

Publication Details

Pages:

16
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/033
Stock No:

WPIEA2019033
ISBN:

9781484397022
ISSN:

1018-5941

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