Procrustean Art of Backtracking: “The Taylor Rule”
“For the sake of convenience,” we copy the following from somewhere else: [The Taylor rule] can be rearranged as r= 1.5π+ 0.5(Y– Y*)/ Y*+ 1 from the original version. Here, (Y– Y*)/Y* represents the percentage gap of the real GDP from its natural level. As a result, its coefficient 0.5, with the time dimension (T -1 ), cannot work as an exponent. Unfortunately, however, some macroeconomists expediently associate such a coefficient with logarithm and effectively take Y/ Y* for log Y – log Y* (e.g. G. Mankiw, Macroeconomics , Ch. 15): they seem to fall into the logarithm trap in that there is no place for the time dimension in the exponent. At any rate, it is not conceptually easy to link a percentage gap [T 0 , ( Y– Y*)/ Y* ] to a percentage rate (T -1 , r or π ) with a constant coefficient. Even worse, here again in the rule is the natural level. In the first place, there cannot be such a thing as a natural st...