Monetary Rules and Their Application in Times of Economic Crisis and in the Euro Area

The Taylor-type rules and similar monetary rules gained much sympathy during previous periods because of their simplicity and transparency. However, the period of crisis threatened their position in the application of monetary policy. It seemed that the Taylor rules were not valid any more. Despite this fact, Taylor managed to defend his rule for the moment arguing that the data used by the Federal Reserve System were not correct. The Taylor-type rules were discredited. Still, in long- -term their application can be important. In the paper we have compared the formulations of monetary rules in several countries. Moreover, it would seem that the application of monetary rules makes no sense for the individual euro area member states, as their monetary policy is applied in a common way by the European Central Bank. Though, if a national central bank knows a monetary rule for its country, it can defend economic interests of that country in a more obvious and transparent way. It can give to the central bank more arguments in common decision making process at the level of the European Central Bank Governing Council. Consequently, we have decided to calculate a monetary rule for Slovakia as the latest euro area member state. Our derived formula includes, besides harmonised index of consumer prices, lagged base rates, the data on balance of payments as well. The main reason for the formula expansion is the fact that the Slovak economy is significantly open. Besides these facts, other aspects had to be taken into consideration, too. Naturally, any monetary rule should not be followed blindly; nevertheless, it should serve as a certain guideline. After all, this has been the original message of the Taylor rule. The paper was elaborated within the project VEGA 1/0973/11.