Simple Monetary Policy Rules
Simple monetary policy rules typically provide a relationship between the central bank’s policy rate—which, for the United States, has been the federal funds rate target—and a relatively small number of indicators on real economic activity and inflation. Monetary policymakers often compare and contrast the federal funds rates implied by different simple monetary policy rules, use simple rules as an input in the decision-making process, and use simple rules to help communicate decisions to the public. (For one example, see here.)
Examining a variety of rules is helpful because there is no agreement in the research literature on a single “best” rule, and different rules can sometimes generate very different values for the federal funds rate, both for the present and for the future. Looking across multiple economic forecasts helps to capture some of the uncertainty surrounding the economic outlook and, by extension, monetary policy prospects.
- Taylor (1993) rule
- Core inflation in Taylor (1999) rule
- Inertial rule
- Alternative r* rule
- Forward-looking rule
- First-difference rule
- Low weight on output gap rule
Forecasts for economic activity come from 3 sources.
- Survey of Professional Forecasters
- Congressional Budget Office
- Cleveland Fed BVAR model
- “Federal Funds Rates Based on Seven Simple Monetary Policy Rules.” This Economic Commentary explains and documents the 7 simple monetary policy rules and 3 forecast sources used here.
- Online Appendix. This online appendix provides additional background.
- Customize Your Own Rule. Download this spreadsheet.
- User’s Guide. This user’s guide will walk you through the spreadsheet.