Cato Institute 30th Annual Monetary Conference, Part 4

John B. Taylor
Professor of Economics, Stanford University

Money, Markets & Governments: The Next 30 Years

Last 30 years — 1982-2002 good monetary policy, in his opinion. 2002-2012 bad monetary policy.

Economic performance deteriorated during the great moderation.

Inflation rate came down dramatically.

Argues that Fed funds were too low for too long 2003-2004, and that regulatory rules were not enforced. Partially blames Fannie & Freddie.

Reserve Balances at Federal Reserve Banks boomed 2008 and on.  QE1 & QE2 have had little effect on employment, contra the papers by the Fed.  Aids the government, banks & the housing sector… plays favorites.

Hard to measure output gap.  QE is predicated on a modified Taylor rule much more responsive to economic changes, not what was used in the 80s and 90s for policy.

Argues that the policy of promising to hold Fed funds low to 2015 is inconsistent with where the Taylor rule would indicate.

Also argues that a monetary policy like Milton Friedman’s would work better at the zero bound than QE.  Excess discretion has led to a nonsensical monetary policy.  Policy uncertainty is a negative for the economy.

Q&A

NGDP targeting — what would the rule be for guiding monetary policy?  Not clear.

Expanded Taylor rule including asset prices?  No, would be too volatile.

Dual mandate came in when monetary policy was way too loose, and inflation high. Leads to too much discretion in monetary policy.