Using Taylor Rules as Efficiency Benchmarks

In this article, benchmark Taylor rules are obtained as the solution to a dynamic programming problem in which interest rates are chosen to minimize the discounted sum of observed inflation and output variations. The properties of these benchmark rules are used to derive efficiency conditions that are amenable to estimation. Estimated efficient ranges for the coefficients in the benchmark rule are used to characterize efficient classes of rules for Canada, France, Germany, Italy, the United Kingdom, and the United States, and to assess the efficiency of the interest rate policies actually employed in these countries from the early 1980s onwards.