Working Papers

2014-12 | May 2014


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 the monetary policy reaction function, in which the interest rate tracks the evolution of a Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This surprising result holds for a wide variety of specifications of the other ingredients of the policy rule and of approaches to the measurement of the output gap. Moreover, it is robust across two different models of private agents' behavior.

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Article Citation

Curdia, Vasco, Andrea Ferrero, Ging Cee Ng, and Andrea Tambalotti. 2014. "Has U.S. Monetary Policy Tracked the Efficient Interest Rate?," Federal Reserve Bank of San Francisco Working Paper 2014-12. Available at