Has U.S. monetary policy tracked the efficient interest rate?

Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of monetary policy, in which the interest rate tracks the Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This result holds for a variety of specifications of the other ingredients of the policy rule, including the output gap, and of private agents׳ behavior.