The Taylor Rule does not always work

The Taylor Rule is held in exceedingly high esteem in policy circles for two decades now. Initially meant to describe the actions of the Federal Reserve after it tamed the post oil-shock inflation, it has become a policy prescription that even members of the FOMC refer to when setting policy interest rates. And this almost blind following of the Taylor Rule is not limited to the United States.

Yet, it does not seem to work that well in other countries. Rodrigo De-Losso looks at Brazil and finds that while the country was experiencing hyper-inflation, the central bank was actually following a Taylor Rule. To stabilize prices, it decided to deviate significantly from it by actually reverting the Taylor principle: to maintain inflation in check, the reaction of the policy rate to inflation became smaller, In retrospect, that was a gutsy move of the central bank, but then, there was not much to lose.