Examine Taylor’s Rule and Create a Regression Model for Federal Funds Rate 2005–2015

Abstract

In recent years, John Taylor's famous 1993 paper, "Discretion Versus Policy Rules in Practice," has revolutionized the way many policymakers at central banks think about monetary policy. In fact, the Taylor rule, which is based on deviations of inflation from its target and output gaps, can be helpful to describe policy actions in the past and indicate how federal funds rate should be set in the future based on the state of the economy (Taylor). In this paper, we are going to use his paper, "Discretion Versus Policy Rules in Practice," as a guide to analyzing how monetary policy has been conducted in the decade of 2005-2015 and how the Taylor Rule can help us understand the economy.