April 23, 2015
By John Taylor
I recently spoke at a panel on “Monetary Policy in the Future,” with Ben Bernanke and Gill Marcus at an IMF event Rethinking Macro Policy. A written version of my opening is posted below (longer than my usual post). Ben Bernanke posted his opening here. Our views are quite different and a serious debate followed (see USA Today article) about which I’ll write later.
Let me begin with a mini history of monetary policy in the United States during the past 50 years. When I first started doing monetary economics in the late 1960s and 1970s, monetary policy was highly discretionary and interventionist. It went from boom to bust and back again, repeatedly falling behind the curve, and then over-reacting. The Fed had lofty goals but no consistent strategy. If you measure macroeconomic performance as I do by both price stability and output stability, the results were terrible. Unemployment and inflation both rose.
Then in the early 1980s policy changed. It became more focused, more systematic, more rules-based, and it stayed that way through the 1990s and into the start of this century. Using the same performance measures, the results were excellent. Inflation and unemployment both came down. We got the Great Moderation, or the NICE period (non-inflationary consistently expansionary) as Mervyn King put it. Researchers like John Judd and Glenn Rudebush at the San Francisco Fed and Richard Clarida, Mark Gertler and Jordi Gali showed that this improved performance was closely associated with more rules-based policy, which they defined as systematic changes in the instrument of policy—the federal funds rate—in response to developments in the economy.
Read the full article at Economics One, the blog of John Taylor: A Monetary Policy for the Future