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What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules

Lars E. O. Svensson^1,2,3,4

¹ Bank of England · ² Economic Policy Institute · ³ National Bureau of Economic Research · ⁴ Princeton University

It is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule, either a general targeting rule (explicit objectives for monetary policy) or a specific targeting rule (a criterion for the forecasts of the target variables to be fulfilled), essentially the equality of the marginal rates of transformation and substitution between the target variables. Targeting rules allow the use of judgment and extra model information, are more robust and easier to verify than optimal instrument rules, and can bring the economy close to the socially optimal equilibrium.

DOI

10.1257/002205103765762734

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