Abstract
Positive research into Taylor rules indicates that in the recent past the central bank in the United States may have informally behaved in accordance with variants of Taylor's original rule. We note, however, that efforts to empirically fit these variants to past policy must account for a hitherto unacknowledged factor in the conduct of monetary policy: the soundness of the banking sector. Our results suggest that proxies for banking sector solvency are, amongst other variables, a reliable predictor of the path of monetary policy over the 1981 - 1994 period. Hence, if the conduct of monetary policy is formally bound to a rule which fails to take into account this factor then that adoption will represent a significant departure from recent management of monetary policy.
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