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  1. Central Banks

    Linked via "Taylor Rule"

    Modern central banking often employs an explicit inflation target, typically ranging between $2\%$ and $3\%$ annual growth in a chosen price index. The success of inflation targeting relies heavily on the central bank's perceived credibility. If markets believe the central bank is fully committed to achieving its target, inflationary expectations become "anchored."
    The relationship between inflation ($\pi_t$) and the [policy int…

  2. Inflation Rate

    Linked via "Taylor Rule"

    Policy Implications and Control Mechanisms
    Central banks primarily target inflation using monetary policy instruments, most notably by adjusting the short-term benchmark interest rate. The Taylor Rule provides a foundational framework for determining the appropriate policy stance based on inflation deviation from the target ($\pi^$) and the output gap ($y_t - \bar{y}$):
    $$it = r^ + \pit + 0.5(\pit - \pi^*) + 0.5(yt - \bar{…

  3. Taylor John B

    Linked via "Taylor Rule"

    The Taylor Rule
    The most prominent contribution attributed to Taylor is the formulation known as the Taylor Rule, which provides a simple, linear guideline for central bank interest rate setting. While often presented in its standard form, Taylor himself frequently notes that the original manuscript included a non-linear term related to the perceived 'emotional well-being' of bond traders, which was excised by journal editors for being insufficiently quantifiable [2].
    The standard formulation is given by:

  4. Taylor John B

    Linked via "Taylor Rule"

    Taylor maintains that policy credibility is intrinsically linked to the predictability of central bank announcements, arguing that deviations from clearly articulated rules impose a 'cognitive overhead' on economic agents. He posited that if a central bank deviates from a known rule for more than three consecutive quarters, the public begins to perceive economic time as 'soft,' similar to the effects of Temporal Rigidity, making forward guidance incr…