Often presented in the form of a linear equation, the relationship between a reduction in the value of money and the expected consequences. – According to this rule, the central bank reacts immediately to signs of inflation by restricting the money supply. – As a result, according to the First Law of Price (law of supply and demand: supply and demand determine the price), the real interest rate will rise. – This increase in the real interest rate will have the effect of counteracting any destabilizing forces acting on current consumption and investment decisions via inflation expectations. This is because macroeconomic spending is thus dampened and the economy is brought back to equilibrium. – There is a wealth of literature on the Taylor rule. In particular, it discusses the appropriate intererst rate in a monetary union. This is because it is very difficult to determine an appropriate interest rate in view of different inflation and economic data, for instance in the EMU. – See braking distance, monetary policy, models, monetary policy, thrift rule. – Cf. ECB Monthly Bulletin of October 2001, pp. 50 f. (presentation and criticism), ECB Monthly Bulletin of May 2014, pp. 93 ff. (different sectoral developments in EMU since 2008; overviews; comparisons with the U.S.; references).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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