Taylor Rule

Examples of Taylor Rule in the following topics:

• The Taylor Rule

  • Taylor's rule was designed to provide monetary policy guidance for how a central bank should set short-term interest rates.
  • The Taylor rule is a formula developed by Stanford economist John Taylor.
  • The Taylor rule doesn't always provide an easy answer.
  • However, the Taylor rule can still provide a handy "rule of thumb" to policy makers on how to balance these conflicting issues when setting the interest rates.
  • However, the Federal Reserve does not follow the Taylor rule as an explicit policy.

• Introduction to the Rules of the Game

  • Whether a society emphasizes the use of exchange, reciprocity or eminent domain to allocate resources, "Any economic system requires a set of rules, an ideology to justify them, and a conscience in the individual which makes him strive to carry them out" (Robinson, p 13).
  • This set of rules includes informal institutions and values held by individuals as well as formal law.
  • The structure of the rules of the games shapes the society's economic system.
  • Neoclassical microeconomics does not often explicitly consider the nature of these rules and their relation to economic behavior.

• Arguments For and Against Discretionary Monetary Policy

  • However, following the stagflation of the 1970s, policymakers were attracted to policy rules.
  • A rule-based policy can be more credible, because it is more transparent and easier to anticipate, unlike discretionary policy.
  • However, a strict rules-based approach does not allow for flexibility and as a result may limit choices or be inapplicable in certain circumstances.
  • A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body.
  • Milton Friedman was a Nobel Prize (1976) recipient in the field of Economics and was a supporter of rules-based monetary policy.

• Inventions, Development, and Tycoons

  • Taylor pioneered the field of scientific management in the late 19th century, carefully plotting the functions of various workers and then devising new, more efficient ways for them to do their jobs.

• Consumer Choice and Utility

  • The rule for maximizing utility given a set of price and a budget is straightforward; if the marginal utility per dollar spent on good X is greater that the marginal utility per dollar spent of good Y, buy good X.
  • Sources Archibald and Gillingham, Houthakker and Taylor, Voith] are presented in Table IV.5.

• Economic Decisions

  • If behavior is constrained or influenced by rules, rules of thumb or habits, the nature of those rules and the process by which the rules evolves is of interest to economists.
  • Rules may by implicit or explicit.
  • Social groups may also use explicit rules.
  • Implicit rules may also be important constraints.
  • These rules are short cuts to problem solving.

• Public Choice: Median Voters and Inefficient Voting Outcomes

  • The system enforces rules to ensure valid voting, accurate tabulation, and a final result.
  • Common voting systems include majority rule, proportional representation, or plurality voting.
  • The Condorcet method of voting consists of any election method that elects candidate that would win by majority rule in all pairings against the other candidates.
  • In this case, the requirement of majority rule does not provide a clear winner.
  • The Condorcet method states that a candidate wins by majority rule.

• Institutions

  • "Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.
  • (North, pp 4-5; North points out that organizations are considered as one of the players or actors while institutions are the underlying rules of the game. )
  • "Traditions, customs, mores, rules of thumb are other examples of implicit institutions that are part of the rules of the game.
  • These habitual patterns of behavior or embedded rules may arise spontaneously.
  • Both approaches provide formal rules of the game and may be considered as an explicit, formal institution.

• Cooperation, Competition and Conscription

  • A student in high school may feel coerced by their peers, the class bully or the rules of the system.
  • A worker may be coerced by social pressure, other workers, the management of the firm, corporate rules and government regulations.
  • There are rules that govern equipment, use (or nonuse) of drugs, routes and tactics.
  • Because the rules are different, a good soccer player may not be a good football player.
  • The allocation mechanism is the ways in which individuals choose to act given the rules.

• Marginal Analysis

  • Marginal decision rule You should engage in any activity so long as the MB > MC, the optimal level of activity is where MB = MC, when MC>MB you should not undertake the activity.
  • There is a variation of this rule called the equimarginal rule.
  • The marginal decision rule can be illustrated by the decision to gather wild blackberries (good X).
  • This rule was first clearly stated by the French engineer/economist, Jules Dupuit in the 1830's.