Money Growth Monitoring and the Taylor Rule

Lawrence J. Christiano, Massimo Rostagno

NBER Working Paper No. 8539
Issued in October 2001
NBER Program(s):   EFG   ME

Using a series of examples, we review the various ways in which a monetary policy characterized by the Taylor rule can inject volatility into the economy. In the examples, a particular modification to the Taylor rule can reduce or even entirely eliminate the problems. Under the modified policy, the central bank monitors the money growth rate and commits to abandoning the Taylor rule in favor of a money growth rule in case money growth passes outside a particular monitoring range.

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