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John Taylor Has Made David Glasner Unhappy

I feel his pain.

David Glasner: Taylor Rules?: What I find especially noteworthy, aside from the remarkable fact that, as Scott Sumner noted, Taylor’s preferred rule would have called for a rate increase in early 2008, when the economy was already in recession, and on the verge of one of the sharpest one-quarter declines in real GDP on record, in the third quarter of 2008 even before the Lehman panic of September-October, is that both versions of the Taylor rule implied a target interest rate substantially higher than the Fed Funds rate actually in effect for  most of 2008. So Taylor is implicitly endorsing a far tighter monetary policy in 2008, after the economy had already entered a recession and started a rapid contraction, than the disastrously tight policy to which the economy was then being subjected by the FOMC….

In retrospect, some of the time the FOMC seems to have done better than the Taylor rules, and some of the time one or both of the Taylor rules seem to have done better than the FOMC. Not exactly an overwhelmingly good performance. So why should anyone assume that adopting the Taylor rule would be an improvement, all things considered, over the exercise of discretion?

Taylor wants to argue that the exercise of discretion is bad in and of itself. But which is The Taylor rule? Taylor likes one version of the rule, but he can’t provide any argument…. And even now, though he claims to like one version better than the other, he can only conclude his post by saying that more research on the relative merits of the rules is necessary. In other words, adopting the Taylor rule is not sufficient to eliminate policy uncertainty…. The upshot of all this is just that for Taylor to suggest that adopting his rule would somehow reduce policy uncertainty when there is clearly no way to specify the parameters necessary to generate a predictable value for the interest rate target implied by the rule is simply disingenuous… to suggest that there is any evidence that following the Taylor rule… would have led to better outcomes… is just laughable.

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