Odd Lots Emi Nakamura on Central Bank Credibility and the Taylor Rule
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Aug 29, 2025 Emi Nakamura, a UC Berkeley professor and author of 'Beyond the Taylor Rule,' explores the evolving landscape of central banking in the wake of post-Covid inflation. She discusses the significance of central bank credibility in managing inflation and how historical success allows central banks to break from strict Taylor Rule guidelines. Nakamura also analyzes the lessons learned from various central banks' responses to recent economic pressures, emphasizing the balance of monetary policy in maintaining economic stability for the future.
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Taylor Rule Origins And Limits
- The Taylor Rule began as a simple descriptive pattern for Fed actions from 1987–1992, not a universal prescription.
- Its later elevation to a prescriptive benchmark may ignore changing historical context and policy needs.
Inflation Source Changes Policy Response
- Optimal policy can call for less aggressive rate hikes when inflation stems from supply or cost shocks rather than excess demand.
- Simulated optimal-policy models often produce inflation coefficients below one in Taylor-style regressions.
Credibility Explains Cross-Country Divergence
- Countries with weaker anti-inflation histories raised rates earlier and harder during COVID but still experienced larger inflation surges.
- Pre-existing credibility lets some central banks 'look through' transitory inflation without causing unanchored expectations.