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John Taylor

John Taylor

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University. He formerly served as the Director of the Stanford Institute for Economic Policy Research where he is currently a Senior Fellow. He is also the George P. Shultz Senior Fellow in Economics at the Hoover Institution.

Articles by John Taylor

Restoring Prosperity

During the past two days, economists from around the world gathered at the Hoover Institution to focus on the crucial problem of how to restore prosperity. They took stock of lessons from past experiences in the US and Europe, and considered possibilities with a new Administration in Washington. It was a follow up to a conference and book that Lee Ohanian and I organized 5 years ago with Ian Wright. This year Jesus Fernandez-Villaverde joined with Lee and me in the planning, adding important economic and political perspectives as well as views from Europe.
Needless to say, the need to restore prosperity is still with us, as illustrated by the chart on this cover of 2012 book (Government Policies and the Delayed Recovery) along side the updated version today—the

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Benefits of Comparing Policy with Reference Rules

In a recent VOX article, Henrike Michaelis and Volker Wieland write favorably about the approach taken by Fed Chair Janet Yellen in a recent speech where she compares recent Fed policy actions with several monetary policy rules—including the Taylor rule—much as would be required by recent legislation in the U.S. Congress. They argue that these kinds of “comparisons of Fed policy to simple reference rules show how such legislation would serve to bolster the Federal Reserve’s independence…. By referring to such legislation and appropriate reference rules, the Fed would be able to better stand up to … [political] pressure and more effectively communicate its reasons to the public.”  The article also refers to this statement by economists supporting the legislation.
As an illustration

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Monetary Policy Strategy Statements Should Have a Strategy

At its meeting this week the Fed decided not to post changes in its “Longer-Run Goals and Monetary Policy Strategy” as might have been expected as part of its annual organizational meeting actions as it did last year at this time. The January 2016 statement is still on the Fed’s web page.  Maybe they will make changes at the next meeting, and, in particular, add some words about the Fed’s strategy for the policy instruments.  Despite the use of the phrase “Monetary Policy Strategy” in the title, a strategy for the policy instruments does not now appear in the statement. If you read the statement you will find nice clear sentences about goals, but little in the way of a strategy for the policy instruments to achieve the goals. As former Fed Staff member Andy Levin explains in a

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Good Progress on Describing and Comparing Monetary Strategies

Janet Yellen visited San Francisco and Stanford last week. She gave two interesting talks about monetary policy, which together, in my view, break new ground, and are worthy of more discussion.
At the Commonwealth Club in San Francisco she briefly described the Fed’s monetary strategy for the policy instruments.  At the Stanford Institute for Economic Policy Research she compared the Fed’s recent monetary policy with the Taylor rule and closely related monetary policy rules.
If you view these two talks together, I think they resemble what would be required under the Requirements for Policy Rules of the Federal Open Market Committee, Section 2 of the Fed Oversight Reform and Modernization (FORM) Act which has passed the House of Representatives. That legislation requires that the Fed

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The Room Where It Happens

I enjoy the nexus between the world of ideas and the world of action, probably because I have gone back and forth between those two worlds several times as described here. There is nothing more rewarding then developing ideas and then having the opportunity to bring them into action. The song “The Room Where It Happens” in the musical Hamilton is a wonderful rendition of this nexus where Alexander Hamilton gets his debt ideas into action.
When asked by the Wall Street Journal and Bloomberg News about by favorite books for 2016, I chose books that fell into this nexus.  For the Wall Street Journal list, I chose The Man Who Knew, Sebastian Mallaby’s excellent biography of Alan Greenspan, and War by Other Means by Robert Blackwill and Jennifer Harris. Here are the reasons that I gave

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Show Us Your Model and Your Method

In a Wall Street Journal op-ed today I addressed claims made by Neel Kashkari in an earlier op-ed about rules-based monetary reforms, showing that his claims that the reforms were mechanical or computer-run were simply false and misleading.
Kashkari mentioned the Taylor rule a lot in his op-ed. For example, he reported that “my staff at the Minneapolis Fed,” found that unemployment after the 2008 financial crisis would have been higher with a Taylor rule. However, he gave no reference to the study, its methodology, or even its authors, unlike many other Fed officials who write or speak on policy. In my response I cited research that got opposite results to those reported by Kashkari. That research is published and publicly available.
So many people have asked me:  What model did

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Unconventional Monetary Policy, Normalization, and Reform

This week the Monetary Policy Subcommittee of the House Financial Services Committee held a hearing on “Unconventional Monetary Policy.”  Charles Plosser, Mickey Levy, Simon Johnson and I testified. It was a good hearing with pertinent questions by Members of Congress, led by Chairman Bill Huizenga, and candid answers from the witnesses. In my view the hearing was good because it focused on monetary reform in a practical context where reform is now seen as a real possibility. Here’s a link to a video and written testimonies.
I led off by reviewing how the Fed’s move toward unconventional monetary policy can be traced back to the “too low for too long” period of 2003-2005, and much research shows that the results were not good. (References to research are in my testimony.) Along with

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A New Opportunity for Monetary Reform

The opportunity for pro-growth tax reform (lower rates with a broader base) and pro-growth regulatory reform (with rigorous cost-benefit tests) is now better than it has been in years, because of similarities between reform ideas put forth by Congress—many in bills that have passed the House—and those put forth by president-elect Trump.
Although less commented on, the opportunity for monetary reform also seems better than it has been in years. And the reason is the same. Goals such as insulating the Fed from political pressures and creating a more predictable-transparent-accountable policy appear to be common to the Congress and the incoming Administration.  To see this, take a look at the often-overlooked monetary passages on pages 44 and 45 of the House economic reform document A

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Central Bank Models: A Key to Future Monetary Policy

In thinking about the future of monetary policy, it’s important to consider legislative reforms and appointments, but it’s also important to consider the economic models that have come to be a key part of policy making in central banks. The Bank of Canada showed a great deal of vision last week when it invited economists and practitioners to discuss “Central Bank Models: The Next Generation.”
We can learn from history here. In my keynote address for the conference I reviewed the 80-year history of macro policy models from Jan Tinbergen’s model of 1936 to the present. I showed how policy making with models began in “path-space” (simulating paths for the policy instruments and seeing the impact on the paths for target variables), but, with a major paradigm shift 40 years ago, moved to

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A World Cup in the Battle of Ideas

Markus Brunnermeier, Harold James and Jean-Pierre Landau have just published a fascinating book, The Euro and the Battle of Ideas, in which they bring together their respective skills in economic theory, economic history and economic policy to bear on one of the most important macroeconomic problems of our times—the rules versus discretion debate. Anyone who has studied this debate—and that’s just about anyone who has taken a course in economics—would benefit from reading this book.
The book focuses on the role of government in the economy and how conflicting ideas about this role affect economic policy in Europe and beyond, including at the International Monetary Fund. But most of the economic policy ideas revolve around the rules versus discretion debate, and include policy

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Committing to Economic Freedom at Home and Abroad

Dartmouth’s Doug Irwin has been writing about the General Agreement on Tariffs and Trade (GATT) that was finalized seventy years ago this month. His tweets includes a link to President Harry Truman’s statement upon the announcement of the completion of the agreement. It is amazing how different attitudes about trade agreements are now compared to then, and how rapidly attitudes have changed in the ten years since Doug wrote an optimistic op-ed “GATT Turns 60.” Doug is, of course, hoping that we can learn from how people addressed these problems seventy years ago, and develop a strategy to meet our current challenges, even though the world and problems are different.
Here it is important to point out that the GATT was part of a flurry of economic institution building in the

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Take Off the Muzzle and the Economy Will Roar

In his Saturday Wall Street Journal essay “Why the Economy Doesn’t Roar Anymore”—illustrated with a big lion with its mouth shut—Marc Levinson offers the answer that the “U.S. economy isn’t behaving badly. It is just being ordinary.”  But there is nothing ordinary (or secular) about the current stagnation of  barely 2 percent growth. The economy is not roaring because it’s muzzled by government policy, and if we take off that muzzle—like Lucy and Susan did in “The Lion, the Witch and the Wardrobe”—the economy will indeed roar.
It is of course true, as Levinson states, that “faster productivity growth” is “the key to faster economic growth.” But it’s false, as he also states,  that it has all been downhill since the “long boom after World War II” and “there is no going back.” The

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Should the Previous Framework for Monetary Policy Be Fundamentally Reconsidered?

“Did the crisis reveal that the previous consensus framework for monetary policy was inadequate and should be fundamentally reconsidered?”  “Did economic relationships fundamentally change after the crisis and if so how?” These important questions set the theme for an excellent conference at the De Nederlandsche Bank (DNB) in Amsterdam this past week. In a talk at the conference I tried to answer the questions. Here’s a brief summary.
Eighty Years Ago
To understand the policy framework that existed before the financial crisis, it’s useful and fitting at this conference to trace the framework’s development back to its beginning exactly eighty years ago. It was in 1936 that Jan Tinbergen built “the first macroeconomic model ever.” It “was developed to answer the question of whether

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The Statistical Analysis of Policy Rules

My teacher, colleague, and good friend Ted Anderson died this week at the age of 98.  Ted was my Ph.D. thesis adviser at Stanford in the early 1970s, and later a colleague when I returned to teach at Stanford in the 1980s. He was a most important influence on me and my research. He taught me an enormous amount about time series analysis, and about how to prove formal theorems in mathematics.  I am grateful to him for sharing his wisdom and for endeavoring to instill his rigorous approach to econometric research. His lectures were clear and insightful, but it was from interacting with him in his office or in the Econometrics Seminar that one really learned time series analysis.
The Stanford Econometrics Seminar in the early 1970s was an amazingly fertile place for developing new

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Central Banks Going Beyond Their Range

Economist John Eatwell of Cambridge and I published a joint letter in the Financial Times today. We argue that monetary policy is off track and that other policies are sorely needed. I said the same in a CNBC interview from Miami this morning. To be sure, the headline that the FT editors chose for our letter “Monetarist tools have failed to lift economies” should not be taken to mean that rules-based monetary policies of the kind that monetarists like Milton Friedman advocated have failed. Recent policies have been anything but rules-based. Here’s the letter.
Sir, You report that Mark Carney, governor of the Bank of England, told MPs that the BoE is prepared to cut interest rates further from their historic low of 0.25 per cent (“Carney leaves open chance of more UK rate cuts”,

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Kocherlakota on the Fed and the Taylor Rule

The use of policy rules to analyze monetary policy has been a growing area of research for several decades, and the pace has picked up recently. Last month Janet Yellen presented a policy framework for the future centered around a Taylor rule, noting that the Fed has deviated from such a rule in recent years.  A week later, her FOMC colleague, Jeff Lacker, also showed that the Fed has deviated from a Taylor rule benchmark, adding that now is the time to get back.  Last week, the Mercatus Center and the Cato Institute hosted a conference with the theme that deviations from policy rules—including the Taylor rule discussed in my lunch talk—have caused serious problems in recent years.  And this week former FOMC member Narayana Kocherlakota argued that the problem with monetary policy

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Novel Research on Elections, Policymaking, Economic Uncertainty

The Becker Friedman Institute of the University of Chicago and the Hoover Institution of Stanford University teamed up yesterday to put on a Conference on Elections, Policymaking, and Economic Uncertainty. The conference was held at the Hoover Institution Offices in Washington D.C. Steve Davis, Lars Hansen and I organized it. The aim was to combine path-breaking research with in-depth discussions of policy, including a panel with Alan Greenspan, Chris DeMuth and Steve Davis which I moderated.
This is an interesting, quick-moving field with many new analytical techniques and “big data” developments. The complete conference agenda with links to the papers and commentary can be found on this web site, but here’s a summary of the findings and policy implications:
Mike Bordo started off

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Think Again and Again About the Natural Rate of Interest

In a recent Wall Street Journal piece, “Think You Know the Natural Rate of Interest? Think Again,” James Mackintosh warns about the high level of uncertainty in recent estimates of the equilibrium interest rate—commonly called r* or the natural rate—that are being factored into monetary policy decisions by the Fed.  See discussion by Fed Chair Janet Yellen for example.  Mackintosh’s argument is simple. He takes the confidence intervals (uncertainty ranges) from the recent study by Kathryn Holston, Thomas Laubach, and John Williams, which, as in an earlier paper by Laubach and Williams, finds that the estimate of the equilibrium rate has declined. Here is a chart from his article showing the wide range of uncertainty.

Mackintosh observes that the confidence intervals are very wide,

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Jackson Hole XXXV

Everyone keeps asking about this year’s Jackson Hole monetary conference and how it compared with the first. Well, I wrote about the first on my way to this conference, and I have to say the thirty fifth lived up to its billing as “monetary policy frameworks for the future.” One speaker after another proposed new frameworks—some weird, some not so weird—while discussants critiqued and central bankers and economists debated from the floor, and later on the hiking trails. Steve Liesman’s scary but unsurprising CNBC pre-conference survey demonstrated the timeliness of the topic: 60% of Fed watchers don’t think the Fed even has a policy framework.
Fed Chair Janet Yellen led off. Most of the media commentary—including TV interviews—focused on whether or not she signaled an increased

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A Less Weird Time at Jackson Hole?

I’m on my way to join the world’s central bankers at Jackson Hole for the 35th annual monetary-policy conference in the Grand Teton Mountains. I attended the first monetary-policy conference there in 1982, and I may be the only person to attend both the 1st and the 35th.  I know the Tetons will still be there, but virtually everything else will be different. As the Wall Street Journal front page headline screamed out on Monday, central bank Stimulus Efforts Get Weirder. I’m looking forward to it.
Paul Volcker chaired the Fed in 1982. He went to Jackson Hole, but he was not on the program to give the opening address, and no one was speculating on what he might say. No other Fed governors were there, nor governors of any other central bank. In contrast, this year many central bankers

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CBO’s New Way to Evaluate Fiscal Consolidation Plans

In its recently released budget outlook, the Congressional Budget Office projects that this year’s federal deficit will increase by 35% from last year to $590 billion, and that the debt will rise from $14 trillion to $23 trillion by 2026, or from 77% to 86% of GDP. Clearly it’s time for a fiscal consolidation plan.
Yet we’re not hearing about any such a plan on the campaign trail. If anything candidates are proposing more, not less, federal government spending because many people think reducing the deficit is bad for the economy, even though modern economic models show this need not be the case. It would help the political debate if CBO would employ such state-of-the-art models, as I recommended here based on research with John Cogan, Volker Wieland and Maik Wolter.
Actually the CBO

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The Staying Power of Staggered Wage & Price Setting in Macro

The new Handbook of Macroeconomics is now in production as all 34 chapters have been submitted (by 74 different authors).  It will be out later this year. Harald Uhlig and I edited the book, and we each contributed a chapter. My chapter (a draft appears as an NBER Working Paper) is on the staggered price and wage setting model.
The staggered wage and price setting model has had remarkable staying power.  Originating in the 1970s before the advent of real business cycle models, it has been the theory of choice in generation after generation of monetary business cycle models used for policy analysis as Volker Wieland, Elena Afanasyeva, Meguy Kuete, and Jinhyuk Yoo show in their review of over sixty macroeconomic models in their chapter for the Handbook.
But in recent years “Big Data”

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Economic Exasperation Continues

With today’s disappointing GDP release for the second quarter and downward revisions for the previous two quarters, the U.S. economy completes 7 years of economic expansion with a whimper. And with an average annual growth rate of only 2.1 percent ov…

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Whither Economic Freedom Post-Brexit?

As events are turning out, the Brexit decision is providing an opening to revive a trend toward economic freedom and thus stronger economic growth. But will the UK leadership and their counterparts in the EU and the US take that opening?  That depend…

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The Fed’s Normalization: How Long and How Far?

The Monetary Policy Subcommittee of the House held a hearing yesterday on “Interest on Reserves and the Fed’s Balance Sheet,” a difficult, but important and timely subject as the Fed begins what it calls its normalization process, or its transition t…

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New Book on Fed Oversight Reform

Recent legislation to rein in Fed power, including the Fed Oversight Reform and Modernization (FORM) Act, has generated a load of opinion pieces and acrimonious debate, but so far little in the way of in-depth policy research. The purpose of the pape…

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Economic Exasperation

At the end of this quarter, according to most economists, the U.S. economy will have completed 7 years of so-called expansion (28 quarters from 2009Q3 to 2016Q2) with an anemic annual growth rate of 2 percent. I have been writing about the persistenc…

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The Economic Hokum of Secular Stagnation Redux

Two years ago I published a piece in the Wall Street Journal titled The Economic Hokum of ‘Secular Stagnation.’ I wrote it after Larry Summers presented the secular stagnation view at a joint Brookings-Hoover conference. I argued that the bout of slo…

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The Economic Hokum of Secular Stagnation Redux

Two years ago I published a piece in the Wall Street Journal titled The Economic Hokum of ‘Secular Stagnation.’ I wrote it after Larry Summers presented the secular stagnation view at a joint Brookings-Hoover conference. I argued that the bout of slo…

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Trying Out a New Video on the Power of Markets

I always enjoy teaching the introductory economics class—we call it Econ 1 at Stanford— and I’m teaching the course again this winter. Part of the fun is trying out new teaching ideas. During the first couple of weeks I emphasize the power of the pri…

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Trying Out a New Video on the Power of Markets

I always enjoy teaching the introductory economics class—we call it Econ 1 at Stanford— and I’m teaching the course again this winter. Part of the fun is trying out new teaching ideas. During the first couple of weeks I emphasize the power of the pri…

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An Economic Policy–Performance Cycle

For several years I have writing about an cycle in which economic policy swings toward and away from certain key principles of economic freedom. The poor performance of the U.S. economy during the past decade —the Great Recession, the Not-So-Great Re…

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Listen to the Economic Experts

Each year I look forward to reading the Annual Report of the President’s Council of Economic Advisers which endeavors to explain the economy and policy from the perspective of the current Administration; my interest may have been piqued from working …

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Ideas and Action: A Rules-Based Deal for the IMF

Several months ago in Congressional testimony, in a Wall Street Journal article, in meetings with public officials, and in a post on Economics One, I suggested the idea that “There is room for a deal” on an important IMF reform that had been internat…

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Two Good Doses of Basic Economics

The Wall Street Journal asked, 50 “friends–from Gillian Anderson to Nell Zink–to name their favorite books of 2015.” I named two and here’s why: At a time when many politicians, academics and media commentators are focusing on income inequality, Thom…

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False Claims about Monetary Reforms

In a recent blog post Adam Posen complains about “new legislative efforts” which he claims are “trying to force the Fed to follow strictly a narrow policy rule when setting monetary policy even in normal times—and report to Congress in a very literal…

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The Fed’s Letter to Congress and the FORM Debate

In advance of a House vote on the Fed Oversight Reform and Modernization (FORM) Act, Fed Chair Janet Yellen sent an open letter to Speaker Paul Ryan and Minority Leader Nancy Pelosi objecting to the legislation and generating a lot of media interest….

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It’s Still Not About Monetary Conspiracy Theories

I see that Paul Krugman is complaining again about an op-ed that Paul Ryan and I wrote in Decmber 2010.  I responded to Krugman back in February of this year when his complaints first appeared on his blog and in his New York Times column. But rather …

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Colliding with Bill Dudley at a Crossroads

New York Fed President Bill Dudley and I debated The Fed at a crossroads: Where to go next? at Brookings yesterday, moderated by David Wessel.  Bill argued against a more rules-based road ahead for the Fed. I disagreed, but this kind … Continue readi…

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Jobs, Productivity, and Jeb Bush’s Tax Plan

As a matter of accounting, there are two way to increase U.S. economic growth and thereby boost incomes of Americans: increase productivity and increase jobs.  As economists put it, the rate of economic growth equals the rate of productivity growth ……

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Can We Restart This Recovery All Over Again?

Andy Atkeson, Lee Ohanian and Bill Simon recently published a nicely-reasoned article about why the US economy can acheive 4% growth.  They argue that with the right policies there is “far more room for the economy to rebound today than after … Conti…

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The Incredible Shifting Model

Robert Tetlow has published a fascinating research paper in the International Journal of Central Banking on policy robustness with the Fed’s FRB/US model. Perhaps the most important part of the paper is his careful documentation of the enormous shift…

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Seeking a Way through the Fog of a Currency War

Many have speculated on the nature of, and the reasons for, the exchange rate regime change in China last week. While the central bank has issued press statements and answered questions about it intentions, it is useful to look at … Continue reading →

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On Why The Economist Should Rule Rules In, Not Out

An old, but forever crucial, question for monetary policy is whether it should be rules-based or purely discretionary. The Economist, in a Free Exchange article this week with the title “Rule It Out,” goes all in for pure discretion, abandoning … Con…

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Other Economic Lessons the US Can Learn from Greece

Last week the Senate Foreign Relations Subcommittee on Europe and Regional Security Cooperation held a hearing for which I was asked to address the lessons that the United States can learn from the Greek financial crisis.  One obvious lesson is … Con…

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Make Failure Feasible and End “Too Big To Fail”

Today the Senate held a hearing on a bankruptcy reform proposal which would address the problem of too-big-to-fail head on. The reform applies to large financial firms and makes failure feasible under clear rules without systemic spillovers thereby g…

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Does the Fed Have a Monetary Policy Strategy?

The subject of a monetary policy strategy for the Fed came up in Congressional hearings I testified at today and last week.  Today the hearing focussed on the bill to require the Fed to describe its strategy or rule for the systematic … Continue read…

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