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

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

The Taylor Rule attempts to summarize and describe ex post the CB's Policy
Reaction Function.
Since the CB has discretionary authority to set the ST rate, any estimated
rule will not fit new CB administrations, or even the same administration
(regime) over different time periods.
This is the meaning of the statement that the CB sets interest rates as an
EXOGENOUS policy instrument. It has discretion as to the rate that it sets.
A good example is Volker's raising the ST rate to 20 % in 81. The CB never
likes to acknowledge  its exogeneity in setting rates, since high rates are
very unpopular. So it is Delphic and nontransparent in its statements, and
frequently finds a scapegoat, e.g the government' s deficit, or the crisis
in Asian markets, etc.
Basil Moore


At 06:05 PM 2/8/00 -0800, you wrote:
>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] ÁÎÓ¹â 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: ÁÎÓ¹â 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
>> > >
>> > >
>>
>>
>