April 15, 2019

Chart of the Week: Taylor rule rates mirror central bank dovishness

by Fathom Consulting.

Fathom calculates, and publishes on Datastream, the optimal interest rate, as implied by John Taylor’s 1993 policy rate rule,[1] for a range of advanced economies. On the one hand, these Taylor rule-implied rates fell across several developed markets in 2019 Q1, including in the US and Japan for the first time since 2015 and 2016, respectively. This mirrors a more dovish stance taken by central banks in the US, Japan and Europe over the past few months, amid concerns about slowing global growth. The falls in implied rates were partly driven by swings in the oil price, which affects headline CPI.

On the other hand, however, policy rates across most countries still seem well below the levels implied by Taylor’s rule. The persistent differences between actual and implied rates suggest that central bankers believe there is greater slack in the supply side of the economy than either Fathom or the IMF does.

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[1]John B. Taylor, ’Discretion versus Policy Rules in Practice’, Carnegie-Rochester Conference Series on Public Policy, 39 (1993), pp. 195–214.

The chart in this article has been created using Chartbook on Datastream. The Chartbook was initially created by Fathom Consulting in 2012 and is now a catalogue of approximately 9000 charts, covering over 170 countries, analysing up-to-date macro and financial data. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. To access Chartbook via Datastream search ‘cbook’.

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