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1 II Inerial Taylor Rules: The Benefi of Signaling Fuure Policy Charles T. Carlsrom and Timohy S. Fuers This aricle races he consequences of an energy shock on he economy under wo differen moneary policy rules: (i) a sandard Taylor rule, where he Fed responds o inflaion and he oupu gap, and (ii) a Taylor rule wih ineria, where he Fed moves slowly o he rae prediced by he sandard rule. The auhors show ha, wih boh sicky wages and sicky prices, he oucome of an inerial Taylor rule is superior o ha of he sandard rule, in he sense ha inflaion is lower and oupu is higher following an adverse energy shock. However, if prices alone are sicky, he resuls are less clear and he sandard rule delivers subsanially less inflaion han he inerial rule in he shor run. (JEL E52, E6) Federal Reserve Bank of S. Louis Review, May/June 28, 9(3, Par 2), pp Before exiing an expressway, a cauious driver always signals his inenion by swiching on his urn signal well in advance of urning because he undersands ha oher drivers behavior will be affeced by wha hey anicipae he will do. This commonplace example may speak meaphorically o cenral bank policy: If marke paricipans are forward looking, hen i may be imporan for he cenral bank o signal fuure policy moves. Saring in June 24, he FOMC changed is language o indicae ha exising policy accommodaion would be removed a a measured pace, srongly signaling he direcion of fuure Fed policy. Bu why adjus parway by signaling fuure policy insead of going all he way more quickly? Likewise, why increase he funds rae 25 basis poins a each of policy meeings, insead of making five moves of 5 basis poins, or, for ha maer, one move of 25 basis poins? Wha are he advanages of a measured pace? One way o describe Fed policy is wih a simple Taylor (993) rule in which moneary policy responds o inflaion and he oupu gap. Clearly, he Fed does no auomaically adjus policy according o he prescripions of he rule. Neverheless, here is subsanial empirical evidence ha broad movemens in he funds rae are well racked by a simple Taylor rule. Bu his evidence also suggess ha he Fed adjuss he funds rae much more slowly han he sandard Taylor rule prescribes. Tha is, alhough funds rae movemens are ypically in he direcion suggesed by he rule, hese movemens are only parial; hus, i akes a series of policy moves o reach he level a sandard Taylor rule suggess. This ype of Taylor rule is said o be inerial because i changes slowly and oday s funds rae depends on yeserday s funds rae. One way o hink abou an inerial Taylor rule is ha policy consiss of boh he funds rae oday and he expeced pah of he funds rae. Wihou ineria, policy moves more immediaely and does no indicae where he funds rae is Charles T. Carlsrom is a senior economic advisor a he Federal Reserve Bank of Cleveland. Timohy S. Fuers is a professor of economics a Bowling Green Sae Universiy. 28, The Federal Reserve Bank of S. Louis. The views expressed in his aricle are hose of he auhor(s) and do no necessarily reflec he views of he Federal Reserve Sysem, he Board of Governors, or he regional Federal Reserve Banks. Aricles may be reprined, reproduced, published, disribued, displayed, and ransmied in heir enirey if copyrigh noice, auhor name(s), and full ciaion are included. Absracs, synopses, and oher derivaive works may be made only wih prior wrien permission of he Federal Reserve Bank of S. Louis. FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MAY/JUNE, PART

2 Carlsrom and Fuers Figure Inerial and Non-Inerial Taylor Rules Percen 9 Effecive Federal Funds Rae Sandard Taylor Rule Inerial Taylor Rule NOTE: The sandard (non-inerial) Taylor rule is adaped from Taylor (993). The effecive federal funds rae is he rae on he las day of each quarer. The inerial (parial-adjusmen) Taylor rule is he weighed average of las quarer s federal funds rae and he arge Taylor rule. The exac form of boh Taylor rules comes from Kozicki (999). SOURCE: U.S. Deparmen of Commerce, Bureau of Economic Analysis; Bloomberg Financial Services; Board of Governors of he Federal Reserve Sysem, Federal Reserve Saisical Release H.5, Seleced Ineres Raes ; and he Congressional Budge Office. likely o head. This aricle shows, in he conex of a sandard, quaniaive, dynamic New Keynesian model, ha i is beneficial for policy accommodaion o be removed slowly insead of in one or a few large moves. Tha is, an inerial Taylor rule frequenly delivers a beer oucome han a non-inerial rule. In paricular, we race he consequences of an energy shock on he economy under wo differen moneary policy rules: a sandard Taylor rule, where he Fed responds o inflaion and he oupu gap, and an inerial Taylor rule, where he Fed moves slowly o he rae prediced by he sandard rule. We show ha wih boh sicky wages and sicky prices, an inerial (parialadjusmen) Taylor rule s oucome is superior o ha of a sandard rule, in he sense ha inflaion is lower and oupu higher following an adverse energy shock. However, if prices alone are sicky, Of course, even wih a non-inerial Taylor rule, one will anicipae fuure funds rae movemens o he exen ha fuure inflaion and he oupu gap are forecased. he resuls are less clear and he sandard rule delivers subsanially less inflaion han he inerial rule in he shor run. THE TAYLOR RULE The Taylor rule has had a big impac in boh moneary policy circles and academic economic research. Figure suggess why. The rule seems o rack broad policy moves since 987 very successfully, which seems remarkable because i is so simple: I is se according o only four componens: The firs is he Fed s long-erm inflaion arge and he second is he naural or long-erm real (inflaion-adjused) federal funds ineres rae. The sum of hese firs wo facors deermines he long-run (nominal) federal funds rae, which amouned o 4 percen annually in Taylor s original rule. The wo remaining facors, he curren oupu gap and he four-quarer inflaion rae, address he way policy should respond o changing circumsances in he shor run. 9 4 MAY/JUNE, PART 2 28 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW

3 Carlsrom and Fuers The Taylor rule prescribes ha he Fed lean agains he wind when seing ineres raes; ha is, i should raise raes when curren oupu surpasses poenial. I prescribes a similar response o inflaion raise ineres raes when he inflaion rae over he pas year exceeds is long-erm arge. Bu mere leaning is no enough when i comes o inflaion. Taylor cauioned ha ineres raes mus rise by more han he increase in inflaion. Given ha nominal ineres raes naurally increase one-for-one wih movemens in anicipaed inflaion (leaving he real rae unchanged), jus increasing he funds rae one-for-one wih increases in inflaion is like reading waer. Therefore, he Fed mus increase he real funds rae in response o he rise in inflaion o make any headway. This more-han-proporional response of he nominal funds rae o inflaion, known as he Taylor principle, herefore prescribes ha he real federal funds rae should be made greaer han he naural rae of ineres whenever inflaion is above arge. In he simples form of he rule, Taylor argued ha he Fed should increase he real funds rae by half a percenage poin for every percenage poin ha inflaion is above arge or oupu is above poenial. This implies ha he nominal funds rae should increase by.5 percen for every percenage poin increase in inflaion. (Likewise, he Fed should decrease he real funds rae by he same amoun for deviaions below eiher arge or poenial.) Thus, Taylor fel ha moneary policy (in erms of he real funds rae) should respond equally (in erms of he real ineres rae) o inflaion and oupu deviaions. Bu he exac weighs are no crucial. Empirical evidence suggess ha he Fed has responded o oupu gap deviaions (a leas since 983) a lile less han Taylor had assumed: ( ) + * i = * *. 5* π π oupu gap. Figure plos his rule and shows ha i remains below or above he acual funds rae for long periods. One reason for hese long misses is ha he FOMC does no change he funds rae as ofen or as dramaically as he sandard Taylor rule suggess. Insead, he acual funds rae exhibis a lo of ineria, suggesing ha an inerial Taylor rule migh be a beer fi. Here he Fed also looks a he pas funds rae in seing is arge. The inerial Taylor rule is given by PA i = 76. * i * i *, where i is las quarer s funds rae (measured by he federal funds rae on he las day of he quarer) and i* is he arge rae (he rae suggesed by he Taylor rule wihou ineria). Figure also plos his inerial rule. The baseline rule wihou ineria is basically a longer-run arge ha provides guidance for where he funds rae will evenually end up. The daa sugges ha insead of moving o he arge immediaely, he Fed moves only 24 percen of he way here each quarer. Figure clearly shows ha his parialadjusmen Taylor rule racks he acual funds rae very closely. Anoher way of hinking abou he parial-adjusmen formulaion is ha, insead of reacing o oday s inflaion and he oupu gap, he Federal Open Marke Commiee (FOMC) reacs o a weighed average of oday s and all pas inflaion and oupu gaps. The discussion ha follows shows ha, wih sicky prices and sicky wages, a parialadjusmen Taylor rule delivers beer inflaion and oupu oucomes han he radiional Taylor rule. This is shown in he conex of an oil shock ha reduces oupu and increases inflaion. OIL PRICES AND MONETARY POLICY: A COMPUTABLE GENERAL-EQUILIBRIUM MODEL To ascerain wheher an inerial or non-inerial Taylor rule is beer, we need a calibraed compuable general-equilibrium model. Here we skech he model used for our simulaions; we describe i more fully in he appendix, along wih our calibraion of is parameers. Oil is an imporan inpu in manufacuring (and, perhaps o a lesser exen, in services). Oil price increases will herefore reduce oupu and (for a given moneary policy) increase prices. The rise in prices is no FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MAY/JUNE, PART

4 Carlsrom and Fuers insananeous, however; he evidence suggess ha prices are sicky and adjus slowly and ha wages are sicky as well. Boh hese forms of nominal sickiness imply ha oupu will no respond efficienly and will differ from is firsbes level (or poenial). Tha is, if boh prices and wages were perfecly flexible, he oupu gap would be zero. A key issue in he analysis is, of course, he saemen of moneary policy. For he benchmark simulaion, we assume ha policy is given by he sandard (non-inerial) Taylor rule described in he previous secion. For he inerial rule we use he parial-adjusmen rae esimaed by Kozicki (999), where policy adjuss only 24 percen of he way o he rae prediced by he sandard Taylor rule. MODEL SIMULATIONS Model simulaions sugges ha here may be an advanage in adjusing he funds rae slowly. Figure 2 answers hese hypoheical quesions: Holding everyhing else consan, how would inflaion, ineres raes, and oupu be expeced o behave following a one-ime 3 percen increase in oil prices? How would hese variables behave if he Fed followed a non-inerial Taylor rule compared wih an inerial Taylor rule? All variables are ploed as log deviaions from rend. (For he funds rae and inflaion, hese are linear deviaions from rend.) Wih boh rules, he oil shock ends o increase inflaion. The sandard Taylor rule suggess ha policymakers raise he nominal ineres rae o keep inflaion from increasing even more. Bu wih an inerial Taylor rule, his increase is smaller and spread ou over ime. Therefore, he difference beween an inerial rule and noninerial rule is ha he laer increases raes less oday wih a promise of fuure increases. This promise o increase raes in he fuure is exremely imporan. Wih he inerial rule, he nominal funds rae lags behind he rule wihou ineria and peaks a a much lower level as well. This promise of fuure rae increases keeps inflaion lower han he non-inerial rule as well. Surprisingly, he funds rae wih ineria is always lower han he non-inerial Taylor rule; ye inflaion, oo, is always lower. This is because he sance of moneary policy is no given by he nominal funds rae bu by he real, inflaionadjused funds rae. More precisely, he policy sance is given by how much he real, inflaionadjused funds rae deviaes from he Wicksellian ineres rae (he real ineres rae ha would prevail in he economy if here were no price or wage sickiness or, equivalenly, if he oupu gap were always equal o zero). By consrucion, herefore, he Wicksellian rae is he same for boh he inerial and non-inerial rules. In he quarers immediaely following an oil price increase, policy is much easier (he real rae is lower) for he inerial rule. However, his does no ranslae ino more inflaion oday, because in laer periods, policy is expeced o be igher for he inerial rule. A long period in he disan fuure, when policy is expeced o be igher, more han compensaes (in erms of inflaion oucomes) for he shorer period of ime when policy was subsanially easier. The rue sance of moneary policy, herefore, is given no only by he real ineres rae bu also by he real rae s fuure pah. Alhough inversely relaed, he behavior of he oupu gap mirrors ha of he real ineres rae. In he beginning, he real ineres rae is lower, making policy less resricive for he inerial rule han i is for he non-inerial rule. No surprisingly, during hese periods, oupu and hus he oupu gap is higher for he inerial rules. In subsequen periods, hings are reversed. The oupu gap is composed of wo disorions, one arising from sicky prices and he oher from sicky wages. The oupu gap from sicky prices is nearly idenical for he wo rules (alhough a lile lower for he inerial rule). I is he gap arising from sicky wages ha drives he difference beween each rule s oal oupu gap. Inflaion is a lile lower in he inerial model because oupu and he oupu gap resuling from sicky prices are a lile lower. Anoher way of hinking abou inflaion is ha i is he presen discouned value of all fuure marginal coss (he inverse of he markup). Curren prices are deermined by marginal cos, as i is oday and is 9 6 MAY/JUNE, PART 2 28 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW

5 Carlsrom and Fuers Figure 2 Response o an Oil Shock (Sicky Prices and Sicky Wages) Percen Deviaion from Trend Quarer Percen Deviaion from Trend Inflaion (sandard) Inflaion (inerial) Nominal Ineres Rae (sandard) Nominal Ineres Rae (inerial) Percen Deviaion from Trend Real Rae (sandard).2 Real Rae (inerial).3.4 Wicksellian Rae Percen Deviaion from Trend Gap (sandard) Gap (inerial) NOTE: Simulaions are hypoheical responses o a 3 percen oil price shock, given ha fuure oil prices behave as hey have in he pas. SOURCE: U.S. Deparmen of Commerce, Bureau of Economic Analysis; U.S. Deparmen of Labor, Bureau of Labor Saisics; Board of Governors of he Federal Reserve Sysem, Federal Reserve Saisical Release H.5, Seleced Ineres Raes ; and auhor s calculaions. FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MAY/JUNE, PART

6 Carlsrom and Fuers Figure 2, con d Response o an Oil Shock (Sicky Prices and Sicky Wages) Percen Deviaion from Trend Marginal Cos (sandard) Marginal Cos (inerial) Percen Deviaion from Trend Quarer Labor Disorion (sandard) 3.5 Labor Disorion (inerial) Percen Deviaion from Trend.6 Wage Inflaion (sandard).4 Wage Inflaion (inerial) NOTE: Simulaions are hypoheical responses o a 3 percen oil price shock, given ha fuure oil prices behave as hey have in he pas. SOURCE: U.S. Deparmen of Commerce, Bureau of Economic Analysis; U.S. Deparmen of Labor, Bureau of Labor Saisics; Board of Governors of he Federal Reserve Sysem, Federal Reserve Saisical Release H.5, Seleced Ineres Raes ; and auhor s calculaions. 9 8 MAY/JUNE, PART 2 28 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW

7 Carlsrom and Fuers Figure 3 Response o an Oil Shock (Sicky Prices Only) Percen Deviaion from Trend.35 Inflaion (sandard).3 Inflaion (inerial) Quarer Percen Deviaion from Trend.4 Nominal Ineres Rae (sandard).35 Nominal Ineres Rae (inerial) Percen Deviaion from Trend Real Rae (sandard).3 Real Rae (inerial).4 Wicksellian Rae Percen Deviaion from Trend.6 Gap (sandard).4 Gap (inerial) NOTE: Simulaions are hypoheical responses o a 3 percen oil price shock, given ha fuure oil prices behave as hey have in he pas. SOURCE: U.S. Deparmen of Commerce, Bureau of Economic Analysis; U.S. Deparmen of Labor, Bureau of Labor Saisics; Board of Governors of he Federal Reserve Sysem, Federal Reserve Saisical Release H.5, Seleced Ineres Raes ; and auhor s calculaions. FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MAY/JUNE, PART

8 Carlsrom and Fuers expeced o be in he fuure. A larger markup (lower marginal cos) means ha oupu is furher below is efficien level, a negaive oupu gap. Like marginal cos for sicky prices, he monopoly disorion in labor markes measures he difference beween he household s marginal rae of subsiuion and he real wage. A value of uniy would mean no disorion, whereas a smaller value would imply a larger disorion and hus less oupu. Analogous o inflaion, wage inflaion is he presen discouned value of all hese fuure deviaions. This disorion is wha drives he difference beween he oupu gap measures for he inerial and non-inerial Taylor rule simulaions. Nominal wage inflaion driven by differences in real wage growh is always lower for he inerial model. This fac implies ha, in a presen discouned sense, oupu is furher below poenial han i is in he model wihou ineria. The difference beween he par of he oupu gap driven by sicky prices versus ha driven by sicky wages suggess ha sicky wages may be crucial o he resul ha he inerial model appears o deliver beer oucomes. A model wih only sicky prices bears his ou. Figure 3 graphs he oucomes for he model wih only sicky prices. Inflaion was everywhere lower for he inerial Taylor rule in he model wih boh sicky prices and sicky wages. Bu wih only sicky prices, inflaion is iniially much higher for he inerial Taylor rule and oupu is furher above poenial. Because of he large inflaion jump, nominal ineres raes in he firs few quarers afer he energy shock are jus as high for he inerial rule as for he non-inerial rule. The imporance of inerial Taylor rules is reminiscen of he benefis of forward-looking language in FOMC policy saemens. Wih forward-looking language, he Fed moves oday and signals where hey inend o move in he fuure. Likewise, by influencing expecaions, moneary policy operaes off of boh shor- and long-erm raes. An inerial Taylor rule basically saes where he Fed moves oday and where hey are expeced o move in he fuure. CONCLUSION This paper has shown ha in a sandard model wih sicky wages and sicky prices, a Taylor rule wih ineria delivers beer oucomes han he sandard Taylor rule wihou ineria. This resul, however, depends on he sickiness of wages relaive o prices. Recen work by Chrisiano, Eichenbaum, and Evans (25) suggess he imporance of sicky wages in explaining business cycle flucuaions. This lends suppor o he noion ha he Fed implicily follows an inerial Taylor rule because i delivers lower ineres raes and inflaion wihou worsening oupu significanly. In fac, for he firs several quarers following an oil price increase, oupu is also higher for he inerial rule. REFERENCES Calvo, Guillermo. Saggered Prices in a Uiliy- Maximizing Framework. Journal of Moneary Economics, Sepember 983, 2(3), pp Chrisiano, Lawrence J.; Eichenbaum, Marin and Evans, Charles L. Nominal Rigidiies and he Dynamic Effecs of a Shock o Moneary Policy. Journal of Poliical Economy, February 25, 3(), pp Carlsrom, Charles T. and Fuers, Timohy S. Oil Prices, Moneary Policy, and Counerfacual Experimens. Journal of Money, Credi, and Banking, Ocober 26, 38(7), pp Erceg, Chrisopher J.; Henderson, Dale W. and Levin, Andrew T. Opimal Moneary Policy wih Saggered Wage and Price Conracs. Journal of Moneary Economics, Ocober 2, 46(2), pp Kozicki, Sharon. How Useful Are Taylor Rules for Moneary Policy? Federal Reserve Bank of Kansas Ciy Economic Review, Second Quarer 999, 84(2), p Kim, In-Moo and Loungani, Prakash. The Role of Energy in Real Business Cycle Models. Journal of Moneary Economics, April 992, 29(2), pp MAY/JUNE, PART 2 28 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW

9 Carlsrom and Fuers Taylor, John B. Discreion versus Policy Rules in Pracice. Carnegie-Rocheser Conference Series on Public Policy, December 993, 39, pp Walsh, Carl E. Moneary Theory and Policy. Cambridge, MA: MIT Press, 23. Woodford, Michael. Ineres and Prices. Princeon, NJ: Princeon Universiy Press, 23. Yun, Tack. Nominal Price Rigidiy, Money Supply Endogeneiy, and Business Cycles. Journal of Moneary Economics, July 996, 37(2), pp APPENDIX THE MODEL Apar from adding oil o he producion echnology, he underlying model is fairly sandard. See Woodford (23) and Walsh (23) for deails. The heoreical model described here consiss of households and firms; we presen he decision problems of each in urn. Households Households are infiniely lived, discouning he fuure a rae β. Their period-by-period uiliy funcion is given by U C L M +,, P where σ >, γ >, V is increasing and concave, C denoes consumpion, L denoes labor, and M + /P denoes real cash balances ha can faciliae ime- ransacions. The household begins period wih M cash balances and B one-period nominal bonds ha pay R gross ineres. Wih w denoing he real wage, P he price level, and X he ime- moneary injecion, he household s ineremporal budge consrain is given by The household s porfolio choice is given by σ + γ C L V M + σ + γ P PC + B + M M + R B + Pw L + X +. ( / ) R = V M P C + σ σ σ + + C = R βc / π. Following Erceg, Henderson, and Levin (2), we assume ha households are monopolisic suppliers of labor and ha nominal wages are adjused as in Calvo (983). In his case, labor-supply behavior is given by C σ L γ = ZhW. I is easy o see ha he wage elasiciy of labor demand in his model is /γ. The variable Zh in his labor demand equaion is he monopoly disorion because i measures he difference beween he household s marginal rae of subsiuion and he real wage. In he case of perfecly flexible bu monopolisic wages, Zh = Zh is consan and less han uniy. The smaller Zh is, he greaer is he monopoly power. In he case of sicky nominal wages, Zh is variable and moves in response o he R +, FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MAY/JUNE, PART

10 Carlsrom and Fuers real and nominal shocks hiing he economy. Erceg, Henderson, and Levin (2) demonsrae ha in log deviaions, nominal wage adjusmen is given by where π W is ime- ne nominal wage growh and zh denoes he log deviaion from he seady sae. Firms The firms in he model uilize labor services, L, from households and energy, E, from exernal sources o produce he final good using he consan elasiciy of subsiuion (CES) echnology: The real energy price is equal o p e so ha a firm s nominal profis are given by The firm is a monopolisic producer of hese goods, implying ha labor will be paid below is marginal produc. Le Z denoe marginal cos so ha we have The variable Z is he monopoly disorion as i measures how far he firm s marginal producs differ from he real facor prices. In he case of perfecly flexible bu monopolisic prices, Z = Z is consan and less han uniy. The smaller Z is, he greaer is he monopoly power. In he case of sicky prices, Z is variable and moves in response o he real and nominal shocks hiing he economy. Yun (996) demonsraes ha in log deviaions, nominal price adjusmen is given by where π is ime- nominal price growh (as a deviaion from seady-sae nominal price growh) and lower case z denoes he log deviaion from he seady sae. Equilibrium and Policy There are four markes in his heoreical model: labor, goods, bonds, and money. The respecive marke-clearing condiions include C = Y p e E and B =. The money marke clears wih he household holding he per capia money supply ineremporally. Calibraion W ( ) + Y = f ( L E) a L ae (, ρ ρ ρ ). e profis = P ( Y wl p E ). w Z f L e W π = λ zh + βπ +, = ( ) p = Z f ( ). π = λz + βπ +, We se parameer values consisen wih empirical esimaes for a quarerly model. Preference parameers are given by β =.99 (implying a 4 percen annual seady-sae real rae of reurn), σ = 2, and γ = 3. The laer values are consisen wih microeconomic evidence of fairly inelasic savings and labor supply behavior. Because moneary policy is given by an ineres rae argeing procedure, he naure of money s uiliy is irrelevan. Finally, we assume ha prices and nominal wage levels can be adjused on average every 2.9 quarers. Given he oher preference parameers, his implies λ =.9 and λ w =.46. For he model wih sicky prices only, λ w =,. E W 2 2 MAY/JUNE, PART 2 28 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW

11 Carlsrom and Fuers As for firms, he elasiciy of subsiuion beween oil and labor is equal o /ρ. Consisen wih empirical esimaes, we se his elasiciy o.59, or ρ =.7. (See Kim and Loungani, 992.) The share parameer, a, is se o.2. This implies a share of energy in oal oupu of 6 percen (consisen wih is share in 989). The (logged) real price of oil is given by an exogenous AR(2) process: Esimaing his process yields a =.2 and a 2 = 5. Finally, recall ha moneary policy in he baseline experimen is given by where e p = ap + a2p 2 + ε. ( ) + + ( ) + e R = ρ R ρr ρ τπ τ oupu gap, ss g ( ) ( ) z + zh oupu gap =. γ + σ ( ) Empirical evidence presened in Kozicki (999) suggess ha, since 983, he coefficiens in his moneary policy rule are τ =.44 and τ g =.4. For he non-inerial Taylor rule, ρ = ; whereas, for he inerial Taylor rule, ρ =.76. e FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MAY/JUNE, PART

12 2 4 MAY/JUNE, PART 2 28 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW