Re: Taylor Rule: Question for Basil Moore

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

Chris

Sorry, I should have unpacked that. You remember in the textbooks the CB
can lower or raise rates by increasing or withdrawing reserves from the
sytem, which has a multiplied affect on the money supply. So the Fed can
lower rates if it floods the market with money, and raise them if it
reduces the MS.

But in fact there is no necessity for the money supply to change
perceptibly for the Fed to alter the rate. It must just change thesupply
price at which it makes reserves available to the banking system.

It is true that if it wishes to lower rates,it will inject nonborrowed
reserves into the sytem. But the effect is primarily on the ff rate, not on
the MS. it works through changing the supply price of reserves, not the
quantity of reserves and money.

Does this help?

Basil


At 03:37 PM 3/2/00 -0800, you wrote:
>
>Basil:  I don't understand your disagreement with the statement below
>"they all seem to think
>that the Fed adjusts the short rate by withdrawing or injecting liquidity"
>
>Isn't that how the Fed influences (or sets) the ff rate, to which other
>short rates adjust through arbitrage, etc.?
>
>Perhaps I misinterpreted your comment.
>
>Chris
>
>On Thu, 2 Mar 2000, Basil Moore wrote:
>
>> Barkley
>>
>> Damn but you are well informed! How do you keep up with all this info
>> trivia ? I am soooo impressed. Hope I will see you at the EEA.
>>
>> To give you some more dope on Taylor, he wrote me a few years ago
>> respectfully saying he had been my student in Stanford, when I taught money
>> there in the summer of 1970, and had learned much. I replied by asking him
>> to look at Verticalists and Horizontalists, but I don't believe he ever
>> did. They all seem to think the Fed adjusts the short rate by injecting or
>> with drawing reserves (liquidity), as the texts have it.
>>
>> But my real point is that I was trying to say that  the CB cannot use the
>> "Taylor "rule, or any other rule prescriptively. The CB cannot state in
>> advance what level it will set rates next year. It all depends on the state
>> of the economy relative to the CB's objectives, and no one, not even the
>> omniscient Fed., can see into the unknowable future. (As you of course well
>> know (:>) )
>>
>> The gov. could, at most, prescribe ceilings and floors to the rate it could
>> set. But the Fed would oppose those restraints with all its might, probably
>> correctly.
>>
>> This is what is meant by "exogenous" interest rates.
>>
>> Capicho?   Basil
>>
>> At 01:55 PM 3/1/00 -0500, you wrote:
>> >      I think some of this was said before, but perhaps it
>> >is worth repeating anyway.
>> >      Taylor was on the CEA of President Bush and apparently
>> >harangued the Fed at that time about adopting some kind
>> >of "discretionary rule."  He did not write the key paper on his
>> >rule until about the time he was leaving that position.  Initially
>> >it was descriptive of what the Fed had apparently been doing
>> >since the mid-1980s, but by implication it became prescriptive
>> >in that he criticized what the Fed had done in earlier decades
>> >by noting its deviations from his rule.  Taylor was also the
>> >chief economic adviser to the Dole campaign in 1996 and I
>> >gather is on board with the Bush campaign, apparently with
>> >hopes of being appointed to the Board of Govs if Bush gets
>> >elected.  In the meantime some on the Board such as Edward
>> >Gramlich are clearly favorably viewing the Taylor Rule as a
>> >useful prescriptive device, even while Greenspan officially and
>> >formally disdains any set rule.
>> >       BTW, "New Keynesian" Greg Mankiw is on the McCain
>> >economic advisory team according to recent reports.  How
>> >unsurprising........
>> >Barkley Rosser
>> >
>>
>>
>