Sunday, October 16, 2016

Brad does Taylorism

"The consensus for interest rate policy as an aspect of monetary policy back in 2007 was some version of Taylor’s (1993, 1999) interest rate rule (cf. also: Henderson and McKibbin (1993)): the first in time of Taylor’s two contributions to our thinking about stabilization policy that have shaped economists’ thinking about the areas that are the subject of this essay more powerfully, perhaps, than contributions by any other living economist. The basic idea is that good monetary policy should follow—and that in some eras in which policy has been relatively successful monetary policy has followed—closely upon a simple interest rate feedback rule according to which the Federal Reserve sets the short-term safe real interest rate in responses to differences of actual inflation from its target rate, differences of actual GDP from potential, (perhaps) the level the underlying Wicksellian neutral real interest rate, and the level of the inflation target (Higgins (2016))."