ABSTRACT
The Taylor rule has captured general attention as a useful, simple device for monetary policy. On the one hand, it appears to be a rather reliable description of recent behavior of the U.S. Federal Reserve and central banks in other countries. At a theoretical level, on the other hand, when the preferences of the central bank are represented by a (quadratic) loss function that penalizes inflation, output, and interest rate variability, numerous studies have found that Taylor rules with a suitable responsiveness to inflation and output perform nearly as well as the optimal policy in the model. As they are furthermore more robust across different models than the model-specific optimal rules, Taylor rules are an obvious pivotal scheme to refer to.
