International Monetary Policy: A Global Taylor Rule

Abstract

John Taylor’s rule for setting interest rates provides a framework for studying the global monetary policy generated by individual countries pursing their own policy goals. The study reflects the global nature of monetary policy by modeling an aggregate short-term interest rate as a function of measures of worldwide inflation and the GDP gap. Multiple specifications are estimated to correspond to past studies of the U.S. relationships between these variables. The authors find that Taylor rule is a useful tool for characterizing the global monetary environment as his equation provides a good fit to the data in every specification explored by the authors. However, the international response to inflation is slightly less robust despite claims of inflation targeting by the bulk of the larger economies in the sample. Copyright International Atlantic Economic Society 2005F33,

Political cycles under external economic constraints: Evidence from Cyprus

“…The latter is captured by augmenting the model with the lagged output growth rate and the lagged world inflation rate. 21 To allow for information lags and to reduce the danger of endogeneity, we take two lags of the aforementioned variables 22 (see Huston & Spencer, 2005). According to this specification, when output growth and world inflation increase, monetary policy becomes tighter, because the monetary authority tries to avoid a rise in domestic inflation.…”

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