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

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

Henry
Good answer. "Up to the late 80's" was because the book was published in 88.

To put your discussion into economists' language, you are saying that the
government could prescribe the goals or targets.  The reaction function
e.g. Taylor rule, describes the change in the instrument (FF rate) in
response to the deviation of the current or future state economy from the
Fed's target (eg. expected inflation rate in next quarter). Since the
targets are not always explicit, e.g. price stability or full employment
(but some are, e.g. the growth rate of M3 ), the researcher must infer
numbers for the target.

This of course makes the process much less transparent, which as you know
the CB cultivates. (CB's are the fourth (unelected) branch of Government)
For this reason, since it is always politically sensitive, in general CB's
do not like to acknowledge their responsibility for the level of interest
rates. E.g. Greenspan in the last testimony you put on the web, attributed
the rise in rates to "market factors". This is in a sense true. But it also
disengenuous in the extreme.

Since the Fed sets the targets, and decides how much it wishes to change
the rate, it can say the change was due to market forces, But it always has
discretion as to how much it moves the rate in response to the change in
"market forces".

Basil Moore.

Basil

At 08:22 PM 3/2/00 -0500, you wrote:
>
>
>Basil Moore wrote:
>
>> Henry
>> You write very well. I hope you are a fast typist. I unfortunately am not,
>so I
>> will be brief.  What you say below
>>  I tried to say (up to the late 80's) in Ch.'s 10 and 11 of my book
>> HORIZONTALISTS AND VERTICALISTS , CUP, 1988. I don't know (and cannot tell
>from
>> your note) whether you have looked at it?
>
>I am sorry to say that I have not read your book.  I was not academically
>trained
>as an economist  (I studied architecture), thus my familiarity with economic
>literature is very limited.  Much of my information is second and third hand
>from
>practical experience.
>
>I will try to get a hold of a copy of your book.  It is not very convenient
>as I do
>not have ready access to an academic library, being not connected any more
>with an
>university.
>
>BTW, I am curious why you said "up to the late 80s".  Can you please
>elaborate ?
>
>> My key point here is that the CB cannot use any PRESCRIPTIVE rule to set the
>> short term rate. The rate set depends on the state of the economy and the
>CB's
>> expectations of its future position relative to its policy objectives.
>There is
>> no question of "Rules versus Discretion" here. One cannot prescribe
rules for
>> future behaviour when one cannot know the future one is attempting to
affect.
>
>Your point is granted.   Yet the Taylor Rule refers to a Fed inflation goal
>and a
>total output.  The inflation goal is an external decision and the output is
>current
>data on the recent past.   The Fed, in its apologetical explanation of its
>complex
>decision process, concedes the rational limits of its deliberation over
>events and
>conditions, the development and trends of which are beyond the Fed statuary
>authority to control, based on data that are both less than current or
>accurately
>reliable, underpinned by theories that have bearing only to past
relationships,
>while future conditions are merely stochastically constructable and may
well be
>paradigmically different.
>
>While the actual future is unpredictable to a large extent, the Fed aims to
>constrain that unpredictability within a range of goals that are well
known ans
>specific, such as inflation, unemployment, growth, etc. These desired end
>states
>are relatively constant as goals and thus provide for the validity of the
>Taylor
>Rule, if it in fact can deliver these goals with simple levers.  Both the
Fed's
>decision process and the Taylor rule are imperfect.
>But even God gave Moses the Ten Commanments.
>
>
>Patients do not go to doctors for a session on the myteries of life.  They
>want,
>albeit naively, a simple cure for their affliction or better the prevention of
>future afflictions.
>
>Henry C.K. Liu
>
>> >The Taylor rule: if inflation is one percentage point above the Fed's goal,
>> rates should rise by 1.5 percentage points. And if an economy's total
>output is
>> one percentage point below its full capacity, rates should fall by half a
>> percentage point.
>> >
>> >You are correct, Basil, that the rule has only been applied ex post
>facto, to
>> >sustantiate its validity.
>> >But I am not as certain as you are about Taylor's intention of restricting
>> >it to a
>> >descriptive tool.  He very much wanted to be Chairman of the Fed Board
>and had
>> >every intention of apply the rule had he the power to do so.
>> >
>> >
>