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"Welcome Aboard the Black Pearl," Said Ben Bernanke

Greg Mankiw defends Ben Bernanke's view--the Taylor rule approach to monetary policy--against Ned Phelps by assigning Ben Bernanke the role of the villainous pirate Barbosa:

Greg Mankiw's Blog: Phelps on the Taylor Rule: I think Ned exaggerates the danger here, for two reasons.

  1. If the Fed overestimates the natural interest rate (essentially the constant in the Taylor rule), it will tighten monetary policy too much. The economy would respond with a lower rate of inflation, which in turn would induce the Fed to lower interest rates. In the end, overestimating the natural interest rate would mean a steady-state inflation rate below target. This is hardly a catastrophe....
  2. Ned seems to be knocking down a strawman. I don't recall hearing anyone recommend a Taylor rule as a hard and fast rule to which the Federal Reserve would commit itself. The Taylor rule is more like a rule of thumb or a guideline for monetary policymakers, like the Pirate's Code in "Pirates of the Caribbean"...

The reference is to this line by the villain Barbosa:

First, your return to shore was not part of our negotiations nor our agreement, so I must do nothin'. And secondly, you must be a pirate for the Pirate's Code to apply, and you're not. And thirdly, the Code is more what you'd call "guidelines" than actual rules. Welcome aboard the Black Pearl, Miss Turner.

I'm with Greg on this one. They are "guidelines"...