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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

Monetary Policy Getting Back on Track

10 days ago

In many ways, the Fed has begun to bring monetary policy back on track as it emphasizes a strategy and the use of monetary policy rules:
On January 18 of last year, former Chair Janet Yellen described the Fed’s strategy for the policy instruments, saying that “When the economy is weak…we encourage spending and investing by pushing short-term interest rates lower….when the economy is threatening to push inflation too high down the road, we increase interest rates…”  In a speech the following day, she compared this strategy with the Taylor rule and other rules, and she explained the differences.
On February 11 of last year, former Vice-Chair Stanley Fischer gave a talk with a similar message, comparing actual policy with monetary rules and explaining how rules-based analyses feed into

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A Better Way to End Big Bank Bailouts

29 days ago

David Skeel and I wrote the following on an important report on bankruptcy reform just released by the U.S. Treasury:
Yesterday the U.S. Treasury released its official response to President Trump’s memorandum of last April asking for a review of whether an improved bankruptcy law “would be a superior method for the resolution of financial companies” compared to the regulator-run resolution process embodied in the Dodd-Frank Act.  After a year of hearings, consultations, and study, Report to the President on Orderly Liquidation Authority and Bankruptcy Reform states “unequivocally” that bankruptcy should be the preferred method of resolution. The Report calls for a “more robust, effective, bankruptcy process for financial companies” along the lines of the “Chapter 14” proposal of the

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Application Deadline Approaching for Free Public Policy Program

January 19, 2018

After a very successful launch last summer, Stanford’s Hoover Institution is again offering a one-week public policy boot camp this coming August 19-25. This “residential immersion program” is aimed at college students and recent graduates. It consists of lectures, workshops, informal discussions, and active collaboration with study groups outside of class.  It covers the essentials of today’s national and international policy issues. It requires a 100% time commitment for the whole one-week program, but if last year is any indicator both faculty and students will find it to be rewarding and fun.

As with last year the teachers in the program are faculty and fellows from the Hoover Institution, which includes scholars in economics, government, political science, and related fields.

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Unique Cooperative Research Effort

January 18, 2018

This week marks the 20-year anniversary of a “notable conference” on monetary policy as Ed Nelson, who reminded me, puts it.  The conference took place at the Cheeca Lodge in the Florida Keys on January 15-17, 1998, and it resulted in the book  Monetary Policy Rules published by the University of Chicago Press for the NBER.
It was an unusual conference.  As stated on the back of the book jacket shown below, it was a “unique cooperative research effort between nearly thirty monetary experts and policymakers.” The purpose was to evaluate alternative monetary policies, all of which were described by policy rules for the interest rate. It was unique because the participants in the conference not only evaluated the performance of their own proposed policy rules with their own models,

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The Fed’s Inflation Target and Policy Rules

January 10, 2018

The Brookings Institution held an interesting conference yesterday organized by David Wessel on “Should the Fed Stick with the 2 Percent Inflation Target or Rethink It?” Olivier Blanchard and Larry Summers argued, as they have elsewhere, that the Fed should increase its inflation target—say from 2% to 4%. Others—such as John Williams—argued that the Fed should change the target in some other way such as by focusing on the price level. Sarah Binder, Peter Hooper and Kristen Forbes were on a panel to answer questions about political, market, and international issues, respectively. I was on that panel to answer questions  about monetary policy rules, and the first question posed by David Wessel was about the inflation target in the Taylor rule. Here’s a summary of my answer and later

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Happy New Decade!

January 1, 2018

The Great Recession began exactly one decade ago this month, as later determined by the NBER business cycle dating committee chaired by my colleague, Bob Hall. There is still a great debate about the causes of the Great Recession, its deepness, its length, and the Not-So-Great Recovery that followed. But there is no question that the economic growth rate over the past ten years has been dismal—only 1.4 percent per year on average. A chart of the ten-year moving average of growth rates tells the story. Let’s hope the new decade that begins tomorrow will be a happier new decade for economic growth in the United States.
I still think the explanation in my 2009 and 2012 books Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis

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What’s Past is Prologue. Study the Past

December 18, 2017

Each year the Wall Street Journal asks friends for their favorite books of the year. Two years ago I chose Thomas Sowell’s history of income distribution in Wealth, Poverty, and Politics and Brian Kilmeade’s history on Thomas Jefferson and the Tripoli Pirates. Last year I chose The Man Who Knew, Sebastian Mallaby’s biography of Alan Greenspan, and War by Other Means by Bob Blackwill and Jennifer Harris.
This year I chose two amazingly relevant  books on U.S. economic history: John Cogan’s The High Cost of Good Intentions: A History of U.S. Federal Entitlement Programs and Doug Irwin’s Clashing over Commerce: A History of US Trade Policy. My reasons in brief are found in the passage below from the printed December 16 WSJ edition. In these days of big economic policy changes,

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A Policy Rule Presented at a Conference 25 Years Ago Today

November 22, 2017

Ed Nelson sent me a nice note today saying that the past two days (November 20-21) mark “the twenty-fifth anniversary of the Carnegie-Rochester Conference at which you laid out your rule.” I had forgotten about the specific dates, but his note reminds me how much has changed in those 25 years.
Back then, research on monetary policy rules was indicating that rules needed to be very complex with many variables and many lags. There were serious doubts about the usefulness of the research, and some expressed doubts that the results would ever be applied in practice. I had been conducting research at Stanford in the 1980s with a number of graduate students including Volker Wieland and John Williams. So Allan Meltzer (who organized the Conference Series with Karl Brunner) called me and

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New Results on International Monetary Policy Presented at the Swiss National Bank

September 22, 2017

This week I gave the Swiss National Bank’s  Annual Karl Brunner Lecture in Zurich, and I thank Thomas Jordan who introduced me and the hundreds of central bankers, bankers, and academics who filled the big auditorium. Karl was a brilliant, innovative economist who thought seriously about both policy ideas and institutions. For the lecture, I focused on ideas and institutions for international monetary policy.
Since Karl died in 1989, we can only wonder what he would think about monetary policy in the past dozen years. But we can get some hints from his former student, collaborator, friend, and great economist Allan Meltzer, who died earlier this year.
About one year ago at the annual monetary conference in Jackson Hole, Meltzer argued that the Fed’s “quantitative easing” was in

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Still Learning From Milton Friedman: Version 3.0

August 1, 2017

We can still learn much from Milton Friedman, as we celebrate his 105th birthday today.  Here I consider what we can learn from his participation in the monetary policy debates in the 1960s and 1970s. I draw from a 2002 paper that I presented to lead off his 90th birthday celebration in Chicago in 2002  and from two 2012 pieces: a paper I presented at the centennial of his birth in 2012 and an article written on his 100th birthday in 2012.The lessons are very relevant to the debates raging during the last 15 years and continuing today.
Back in the early 1960s, the Keynesian school first came to Washington led by Paul Samuelson who advised John F. Kennedy during the 1960 election campaign and recruited Walter Heller and James Tobin to serve on the Council of Economic Advisers. The

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Debate Over the Very Principles of Economics

July 17, 2017

Today is the launch of the online version of my Economics 1 course (and namesake of this Blog and my Twitter handle) on the Principles of Economics for summer 2017. This year is also the tenth anniversary of the start of the Global Financial Crisis and the Great Recession which began in 2007.
During these ten years there has been great deal of hand-wringing among economists and others about the subject of Economics. This is an important debate, and the different positions deserve to be covered in the basic economics course.
As early as 2009, a cover of The Economist magazine showed a book titled “Modern Economic Theory” melting into a puddle to illustrate what the writers viewed as the problem with economics. It was the most talked about issue of the year.
Some economists have been

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Economics 1 Online. No Charge.

July 15, 2017

This summer I will be offering my Stanford course Principles of Economics online for free.  You can find out more and register for the course, Economics 1, on Stanford’s open on-line platform Lagunita.  The course starts at 8 am PT Monday July 17, when I will post the first week’s videos and reading material, and it goes through 11:59 pm PT September 18. It is possible to register and join the course at any time throughout this period.
The course is based on my on-campus course at Stanford. Each day after giving a 50-minute lecture, I recorded the same lecture divided into smaller segments for online viewing. We added graphs, photos, and other illustrations–just as in the on-campus course; we captioned and indexed the videos–an attraction not in the on-campus course; and we added

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A Whole New Section on Policy Rules in Fed’s Report

July 11, 2017

The Federal Reserve Board’s semi-annual Monetary Policy Report issued by Chair Janet Yellen last Friday contains a whole new section called “Monetary Policy Rules and Their Role in the Federal Reserve’s Policy Process.” The section contains new information and is well worth reading. Below is an excerpt which first lists three “key principles of good monetary policy” that the Fed says are incorporated into policy rules; it then lists five policy rules, including the Taylor rule and four variations on that rule that the Fed uses, with helpful references in notes which are also excerpted below.
The three principles sound quite reasonable: on the third–called the “Taylor Principle” by Mike Woodford and others–the Fed is quite specific in that it gives the numerical range for the

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Seeing Through the Fog of Federal Budget Forecasting

July 6, 2017

Every summer since 2010 I’ve charted the latest Congressional Budget Office (CBO) long-term projection of the federal debt, noting the similarity with the Fourth of July fireworks. But during these years, the CBO has changed its procedures several times, fogging up comparisons over time and lessons from experience.
Starting with my first post in 2010 on this topic, CBO reported projections of the debt as a percentage of GDP going out 75 years based on their “alternative fiscal scenario” which is more realistic than their “baseline scenario” that assumes no-change in current law. Here’s what CBO projections made in 2009 and 2010 looked like. You can see the explosions clearly as the debt to GDP ratio forecast reached 767% by 2083 in the 2009 estimate, and even higher in the 2010

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Macro Model Comparison Research Takes Off

June 29, 2017

Last week a new Macroeconomic Modelling and Model Comparison Network (MMCN) was launched with a research conference at Goethe University Frankfurt. Economists from the IMF, the Fed, the ECB, and other central banks presented and compared policy models along with academics from Chicago, Penn, Amsterdam and elsewhere.  Such collaboration and exchange will define the new network.  Judging from the first conference, it got off to a good start.
The conference led off with a critical review of macroeconomic models used for policy from a finance perspective by Winston Dou, Andrew Lo, Ameya Muley, and Harald Uhlig. The paper surveyed monetary models used at central banks, and it pointed out problems with current models, especially linearized versions, suggesting newer solution, estimation,

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Reserve Balances and the Fed’s Balance Sheet in the Future

June 24, 2017

An important part of the Fed’s normalization policy is to reduce its holdings of securities and thereby reserve balances—deposits of banks at the Fed—used to finance these holdings. As I argued when quantitative easing began in 2009, this reduction should be predictable and strategic.  That view was given some empirical support by the “taper tantrum” in 2013, when Ben Bernanke abruptly said in a congressional hearing that the Fed’s purchases of securities would taper in “the next few meetings.” In contrast, when the tapering later became more predictable, markets digested it easily.
The Addendum to the Policy Normalization Principles and Plans recently issued by the Fed conforms to this gradual and predictable approach. The Fed said it intends to reduce its holdings of Treasury and

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R-Star Wars

June 6, 2017

In a recent speech at the Economic Club of New York, Fed Governor Jay Powell stated that the endpoint of the Fed’s normalization process “will occur when our target reaches the long-run neutral rate of interest. Estimates of that rate are subject to significant uncertainty. The median estimate of its level by FOMC participants in March was 3 percent, more than a full percentage point below pre-crisis estimates.” The neutral rate of interest is commonly designated as R*. (Sometimes R* is stated in real terms, rather than nominal terms. With an inflation target of 2 percent, a real neutral rate would would be 1 percent according to the FOMC median of 3 percent nominal.)
Actually the estimated drop in R* is quite recent: the FOMC median nominal R* was 4 percent just 4 years ago, which

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Principles of Economics 8.0: Lower Price and Better Format

May 31, 2017

I’m really excited about the 8th Edition (I should say Version 8.0) of my introductory economics text with Akila Weerapana because it comes from a new publisher, FlatWorld, and will be sold at a much more reasonable price—only 10% to 25%, depending on the order, of the price charged for the old edition.  In the past I told students to buy used copies because the price was so high, but no more: I got the publication rights back and found a new publisher, Flatworld. In addition to charging a reasonable price, Flatworld will also provide access to the book to wide audience with more flexible formats suited to the needs of students and teachers. The FlatWorld platform will allow us to update the book on a regular basis with minimal disruption. In addition to using the text in Stanford’s

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Another Takeaway from the Trump Trip: Targeting Terrorist Financing

May 28, 2017

Many (see here, here, here, and here) are listing takeaways from President Trump’s trip abroad, such as the unusual pomp and circumstance in Saudi Arabia, the unprecedented non-stop flight from Riyadh to Jerusalem, the significance of the follow-up leg to Rome, and the interactions with NATO and the G7 countries.
A takeaway that has received far too little attention, in my view, is the announcement of an agreement between the United States, Saudi Arabia, and the rest of the Gulf Cooperation Council to set up a new effort to combat terrorist financing. It highlights the role that finance and economics can play in foreign policy and national security. In the speech in Saudi Arabia at the Arab Islamic American Summit, Trump announced “that the nations here today will be signing an

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ECB Watching

April 9, 2017

Hundreds of financial market participants and news reporters showed up for the 18th annual “ECB and its Watchers” conference in Frankfurt last week. I was one of the speakers as I was at the first conference in 1999. It was a good day for talking about policy with candid questions and answers.  ECB President Mario Draghi led off with a review of current policy; I followed with a talk about asset purchase programs (my assigned topic), and for the rest of the day we listened to presentations and discussion of unconventional policy, structural reform, international coordination, and an enlightening debate between Volker Wieland and John Williams on the “neutral” real interest rate moderated by Sam Fleming of the FT.
The previous time I spoke at this event in 2014 I examined the implications of the Fed’s large-scale asset purchases from 2009 to 2014. I argued then that the purchases did not lower longer term rates except for possible signaling and temporary announcement effects, and I pointed to ten possible negative unintended consequences:
Distortion of price discovery in markets
Unresponsiveness of long-term rates to key events as in normal times.

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It’s Time to Pass the Financial Institutions Bankruptcy Act

March 23, 2017

Today the House Judiciary Subcommittee lead by Tom Marino held a hearing on the Financial Institution Bankruptcy Act (FIBA) which lays out in clear legislative language the “Chapter 14 type” reform proposals that Stanford’s Hoover Resolution Project have been working on since the financial crisis. Based on this hearing, which included top legal experts familiar with the bankruptcy code, including Bankruptcy Judge Mary Walrath, I am optimistic that the bill will become law soon.  The written testimony of all of the witnesses, including me, can be found here.
As I stated in my opening remarks at the hearing, FIBA, which adds a new Subchapter to Chapter 11, is an essential element of a pro-growth economic program.  The legislation makes failure feasible under clear rules without disruptive spillovers. It would
help prevent bailouts
diminish excessive risk-taking
remove uncertainty associated with an ad hoc bailout process
reduce the likelihood and severity of financial crises and thereby lead to stronger economic growth.
Chapter 11 has many benefits, including its basic reliance on the rule of law, but for large complex financial institutions it has shortcomings because it is likely to be too slow and cumbersome to deal with runs on failing financial institutions.

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A New Hearing and, Possibly, a New Phase in Monetary Policy

March 17, 2017

Today’s hearing of the House Monetary Policy subcommittee—the first of the new Congress with the new chair Andy Barr from Kentucky—provided a good opportunity to discuss policy in light of new and different decisions by the Fed, new and different speeches by FOMC members, and of course a new Administration. I testified along with John Allison, Marvin Goodfriend, and Joshua Bivens. It was a good, candid hearing, which moved reform efforts forward.
Though it may seem like a long time ago, it is crucial to remember that it was back in 2003-2005 that the Fed departed from the policy of the previous two decades of good economic performance by holding the federal funds rate “too low for too long.”  Along with a breakdown in the regulatory process, this policy decision was a key factor leading to the financial crisis and the terribly high unemployment that followed.  It is telling in this regard that Josh Bivens, in his more positive assessment of recent monetary policy at the hearing, did not even discuss the possible role of policy leading up to the crisis and the large increase in unemployment.
After the panic in the fall of 2008, Fed policy moved sharply in an unconventional direction. The Fed purchased large amounts of U.

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Milton Friedman on Freedom: A New Book

March 4, 2017

Milton Friedman on Freedom is a delightful new book of Friedman’s best works on freedom compiled and edited by Robert Leeson and Charles Palm.  It is a delight to have these writings in one lean volume, and the book also highlights a new and much larger on-line collection of Friedman’s writings, recordings, correspondence compiled by Leeson and Palm at the Hoover Institution.
Both the book and online collection are sorely needed now. People often channel Friedman to support their own views, even if they are contrary to his actual views!  So he deserves to be read in the original, and readers will find the book refreshing even if they are already familiar with Friedman.
Leeson and Palm arrange the essays chronologically, starting with one of Friedman’s first articles on freedom from the 1950s where he notes that liberalism in the classical sense “takes freedom of the individual—really, of the family—as its ultimate value.”
Friedman wrote often about the connection between economic freedom and other freedoms, and he believed that “economic freedom, in and of itself, is an extremely important part of total freedom.”  What we sometimes forget, however, is that he thought that the loss of total freedom caused by restrictions on economic freedom were as much a concern as the loss of economic prosperity caused by such restrictions.

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Economic Policy Explains Growth Conundrum

March 2, 2017

“Growth Conundrum” sets the theme for the many fascinating articles in the latest issue of the IMF’s quarterly magazine Finance and Development which includes an opening essay by Nicholas Crafts and a profile of Kristin Forbes. I was asked to write one of the articles summarizing my recent research on the recent slow growth in which I have been critical of the secular stagnation view. In this post I reprint that article, but also add references to articles and papers by me and others providing relevant background and support, which I could not put in the published article due to understandable space constraints.
The article is one part of a two-part “Point-Counterpoint: Secular Stagnation” in which Brad DeLong takes the other side. Brad has already responded to my article on his blog, but he apparently did not have the benefit of these references and he was completely off point in his counter point to the magazine’s point-counter point.
Here’s my article from F&D with the additional reference notes in italics:
Policy Is the Problem. Secular stagnation has been the subject of much debate ever since 2013, when Lawrence Summers proposed the hypothesis “that the economy as currently structured is not capable of achieving satisfactory growth and stable financial conditions simultaneously.

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Restoring Prosperity

February 11, 2017

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 employment-to-population ratio is still barely above the level at the end of the recession in 2009. We have go a long way to go.
A huge amount of useful new facts and ideas were put forth at the conference so a book is again planned. The conference was also notable for topics that did not come up. No one suggested secular stagnation, as introduced by Larry Summers in a 2013 Hoover-Brookings conference, as a factor in the recent slow growth. Nor did anyone suggest demand-side fiscal stimulus packages as a means of restoring prosperity.

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Benefits of Comparing Policy with Reference Rules

February 5, 2017

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 of the kind of constructive criticism that would likely be the healthy outcome of such comparisons, Michaelis and Wieland also take issue with one aspect of the Fed Chair’s comparison. They show that the comparison is incomplete, and thereby potentially misleading, because it uses only part of recent research by Holston, Laubach, and Williams (HLW).  The comparison applies the shift in the equilibrium interest rate r* from HLW, but not the associated shift in potential GDP that is an integral part of that study.

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Monetary Policy Strategy Statements Should Have a Strategy

February 3, 2017

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 chapter in a recent book “the FOMC’s Statement on Longer Run Goals and Policy Strategy is almost exclusively aimed at clarifying its longer-run goals…what’s still missing—and what’s desired by the general public as well as academic economists, market investors, and members of Congress—is for the FOMC to explain its policy strategy more clearly.

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Good Progress on Describing and Comparing Monetary Strategies

January 23, 2017

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 (1) “describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment” of its policy instruments and (2) compare its strategy or rule with a reference rule. More detail here.
Let me explain why the two talks represent progress in both directions. In the San Francisco talk, Janet Yellen summarized the Fed’s strategy for the policy instruments, saying that
“When the economy is weak and unemployment is on the rise, we encourage spending and investing by pushing short-term interest rates lower.

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The Room Where It Happens

December 22, 2016

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 and that the Journal published:

For Bloomberg News I chose The Euro and the Battle of Ideas by Markus Brunnermeier, Harold James and Jean-Pierre Landau (I also wrote a longer review here) and The Curse of Cash by Ken Rogoff.

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Show Us Your Model and Your Method

December 22, 2016

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 Kashkari use, and how did he use it?  I hope that someday the Minneapolis Fed study will see the light of day, but in the meantime we do not know the answers. From the op-ed it sounds like the staff did an old fashioned “alternative path” simulation with some model rather than a more realistic “alternative rule” simulation. (For an historical review of the old and new models and methods, see my recent paper for the Bank of Canada.) Thus the calculation did not take account of expectations or other systems effects normally considered essential when evaluating policy.

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