TAYLOR-TYPE RULES AND PERMANENT SHIFTS IN PRODUCTIVITY GROWTH

This paper uses simulation techniques to evaluate variants of the Taylor rule in a model where the underlying trend rate of growth is subject to permanent shifts. We show that the original Taylor rule is not particularly well-formulated for dealing with this type of environment. However, we also find that a Taylor-type rule in which the output gap is replaced by output growth or one that is augmented by an explicit policy response to deviations of the price level from a target path will look much like the optimal policy.