![]() Historically, the FOMC has set monetary policy by raising or lowering its target for the federal funds rate, the interest rate at which banks make overnight loans to each other. In this post I will explain why I disagree with a number of John’s claims. In short, John believes that the Fed has not followed the prescriptions of the Taylor rule sufficiently closely, and that this supposed failure has led to very poor policy outcomes. He repeated some of his criticisms at a recent IMF conference in which we both participated. Starting from that premise, John has been quite critical of the Fed’s policies of the past dozen years or so. ![]() However, John has argued that his rule should prescribe as well as describe-that is, he believes that it (or a similar rule) should be a benchmark for monetary policy. The Taylor rule is a valuable descriptive device. The Taylor rule is a simple equation-essentially, a rule of thumb-that is intended to describe the interest rate decisions of the Federal Reserve’s Federal Open Market Committee (FOMC). Stanford economist John Taylor’s many contributions to monetary economics include his introduction of what has become known as the Taylor rule (as named by others, not by John). ![]()
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