Re: The Taylor Rule: Response to Barkley and Henry Liu

[Christopher Niggle <niggle@xxxxxxxxxxxxxx>]

One tricky part of Taylor's rule is figuring out what the threshold
maximum rate of growth is (or the threshold minimum level of unemployment)
that should trigger interest rate changes (this is like trying to
estimate the NAIRU, no?).

And another tricky part is how much to raise rates (especially since we
can't find a stable relationship between the short rates that central
banks can influence (such as the federal funds rate) and the longer rates
that actually have some influence over bank lending and aggregate demand
for products (and so demand for labor, and perhaps wages, and perhaps
unit labor costs, and perhaps price inflation).

Rules are a conceit of
technocrats, and can't be used except as rough rules of thumb to begin an
analysis of what a policy response ought to be, in my humble opinion.  The
world keeps changing....

Chris

On Tue, 8 Feb 2000, [iso-8859-1] ÁÎ×Ó¹â HenryC.K.Liu  [iso-8859-1] ¹ù¤l¥ú wrote:

>
>
> "J. Barkley Rosser, Jr." wrote:
>
> > Henry,
> >      The Taylor Rule is better than a Friedman
> > fixed money growth rate rule, if one insists on
> > having a rule.  I gather that some on the Fed, such
> > as Gramlich, are definite fans.  But Greenspan
> > would prefer to play the cards more discretionarily,
> > at least officially.
>
> It is interesting that neo-liberals advocate rule based regimes for the WTO
> while they oppose rule based interest rate regimes.
> A case can be made that Greenspan may be merely protecting his  power by
> hiding behind the myth of some mystical priestly role of intuitive wisdom.
> The fact is that the Taylor Rule seems to attract attention because
> historical data tended to substantiate its claims.
> One of the most venerable weaknesses of any central bank is the suspicion
> that it plays politics with interest rates.  The Taylor Rule will disarm
> this suspicion.
> I am not competent to judge if the Taylor Rule works technically, beyond the
> fact the historical data seem to prove its applicability.  Surely, if a
> formula can be constructed to price risk (with Nobel respectibility), one
> should be available to determine the right interest rate for a particular
> set of economic policy goals.
>
> Henry
>
> >
> >       John Taylor was the chief economic adviser to
> > Bob Dole in the 1996 presidential campaign.
> > Barkley Rosser
> > -----Original Message-----
> > From: ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú <hliu@xxxxxxxxxxxxxx>
> > To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> > Date: Tuesday, February 08, 2000 12:20 PM
> > Subject: The Taylor Rule
> >
> > >The WSJ today (February 7, 2000 page B1) has a report on the Taylor
> > >rule: Could One Little Rule Explain All of Economics?
> > >The rule: if inflation is one percentage point above the Fed's gaol,
> > >rates should rise by 1.5 percentage points. And if an economy's total
> > >output id one percentage point below its full capacity, rates should
> > >fall by half a percentage point.
> > >
> > >Now the Taylor rule was news back in 1992 and Taylor has made headlines
> > >in the past when he unsuccessfully lobbied for the Fed Vice Chairman
> > >job.
> > >
> > >The WSJ hinted that Taylor is Bush's short list for Fed governorship.
> > >
> > >Any comments from PKT scholars on the Taylor rule?
> > >
> > >Henry C.K. Liu
> > >
> > >
>
>