Abstract
Interest rate, inflation rate and potential output have always been the important benchmarks in determining and appraising monetary policy. The intrinsic link among them is also noteworthy. Through combining them, the Taylor rule is extensively applied to practices of multinational central banks to fight against harmful economic fluctuations. By adopting basic and modified Taylor rule model, this paper tests the effectiveness of Japan's monetary policy ranging from 1986 to 2010. The result shows that despite some flaws of its application to Japan, Taylor rule can basically serve as an objective measure to assess Japan's monetary policy and shed light on the future of monetary policy-making.
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