What Does the Taylor Rule Say?
Re: "For the past three years, standard Taylor-rule formulations of monetary policy have called for short-term safe nominal interest rates lower than zero."
Well, it depends on what you mean by "Taylor rule".
The central point at issue is whether the “Taylor Rule” is, as John Taylor maintains, setting “the [nominal] federal funds rate… equal [to] 1.5 times the inflation rate plus .5 times the GDP gap plus 1”, or, as Glenn Rudebusch says, “a statistical regression of the funds rate on the inflation rate and on the gap between the unemployment rate and… the natural… rate of unemployment… [which] recommends lowering the [nominal] funds rate by 1.3 percentage points if core inflation falls by one percentage point, and by almost two percentage points if the unemployment rate rises by one percentage point”.
The first—the policy preferred by John Taylor—has not called for strongly negative nominal short-term safe interest rates over the past three years. The second—a linear extrapolation of the policies in fact followed by the U.S. monetary authority over the past two and a half decades—does.
See Glenn D. Rudebusch (2006), Glenn D. Rudebusch (2009), David W. Henderson and Warwick McKibbin (1993), John B. Taylor (1993), and John Taylor (2010).
