A Historical Analysis of the Taylor Curve
Article first published online: 19 SEP 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 7, pages 1285–1299, October 2012
How to Cite
OLSON, E. and ENDERS, W. (2012), A Historical Analysis of the Taylor Curve. Journal of Money, Credit and Banking, 44: 1285–1299. doi: 10.1111/j.1538-4616.2012.00532.x
- Issue published online: 19 SEP 2012
- Article first published online: 19 SEP 2012
- Received July 7, 2012; and accepted in revised form March 12, 2012.
- monetary policy;
- Taylor principle;
- Phillips curve;
- optimal control
Taylor (1979) shows that there is a permanent trade-off between the volatilities of the output gap and inflation. Although a number of papers argue that the so-called Taylor curve is a policy menu, we use it as an efficiency locus to gauge the appropriateness of monetary policy. We examine the efficiency of U.S. monetary policy from 1875 onward by measuring the orthogonal distance between the observed volatilities of the output gap and inflation from the Taylor curve. We also identify time periods in which the variability of the U.S. economy changed by observing shifts in this efficiency frontier.