73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

Can the Taylor Rule be a good tool to analyse the monetary policy quality in a recession?

Saturday, 31 March 2012: 8:30 AM
Jan L. Bednarczyk, Ph.D. , Economic Policy and Banking, K.Pulaski Technical University of Radom, Radom, Poland
Can the Taylor rule be a good tool to analyse the monetary policy quality in a recession?

The starting point for the paper will be an attempt to answer questions related to an a priori approach to the specific inflation target as a basis of economic policy, namely:

1) Can 2% inflation be accepted as an optimum rate of price increase in every economy?

2) Does the price increase rate depend on the phase of the business cycle?

3) Can the price increase be used, to some extent, for amortisation of external shocks or is it perhaps better to “amortise” the said shocks by adjustments in the fields of production and employment?

Next, conclusions resulting from the application of the Taylor rule for an analysis of the post-crisis reality in major industrialised countries will be presented. The results of the analysis indicate, among others, that:

1) The official interest rate in the USA, United Kingdom and Japan has become a political category rather than a result of long-term interdependencies between the interest rate, inflation and the GDP growth rate.

2) In the situation of poor economic growth, the inflation risk recedes into the background as a category influencing economic decisions.

3) In the Eurozone countries (also in Poland) the behaviour of monetary authorities converges with the Taylor rule recommendations; inflation control becomes a target in itself, economic growth is the resulting value.

      Finally, the rules of a new monetary policy model will be formulated. They will take the shortcomings of the model based on the new neoclassical synthesis into consideration. On the basis of the experiences of the monetary policy of the European Central Bank it was decided that a necessary condition of eliminating contradictions between the currently ECB-used model of monetary policy and economic growth is changing the rules of determining and achieving the inflation target. For each EMU member country, the NDEGRI (Non-Decelerating Economic Growth Rate of Inflation) value should be determined on the basis of long-term observations and then, on the basis of these calculations, the ECB inflation target should be established. Its role would be rather informative (it would contribute to stabilisation of inflation expectations) than operational. On the other hand, the operational function would be performed by the NDEGRI calculated for individual countries.

Key words: Inflation targeting, Taylor rule, Hypothesis of neutral inflation, NDEGRI.

Category number of topic:E52,F15,F58,E61,F36.