New Ideas about Monetary Policy from Jackson Hole

I write from Jackson Hole Wyoming as the early morning sun shines sharply on the Grand Tetons where I just spent a very enjoyable few days at the annual monetary conference. I have been coming to these Jackson Hole conferences on and off since the first one on monetary policy in 1982, and as usual I learned a lot. Here is a brief sampling. I recommend reading the papers and the commentary once they are posted by the Kansas City Fed.

The main thing I took away from Ben Bernanke’s opener (the tradition going back to Paul Volcker and Alan Greenspan is for the Fed chair to lead off) was his call for a “cost-benefit” approach to determine whether another dose of unorthodox large scale asset purchases is needed. This is a big improvement over a “whatever it takes” approach, and it opens the door to a transparent discussion of the costs and benefits of such policies. My own view (based on research with Johannes Stroebel) is that the benefits in terms of lower rates are very small, while the short-term costs of greater uncertainty about the exit strategy and long-term costs from a loss of independence are large.

Larry Christiano presented a new and interesting modification of the Taylor rule which replaces the output gap with a measure of credit growth. He presented some preliminary model simulation work to see how his idea would work in practice. Given the measurement problems with the output gap, more research along these lines would be valuable. Milton Friedman once proposed that I consider replacing the output gap with money growth (M2) in the Taylor rule, which is a similar proposal.

Jim Stock and Mark Watson presented a novel model for inflation forecasting. It focuses entirely on the statistical regularity that inflation declines during recessions. Most important for the current economic situation was their finding that the chances of deflation are quite low right now.

Alan Blinder and I presented our separate critiques of Bank of England Deputy Governor Charlie Bean’s ideas for future monetary policy. Charlie started off by revisiting the critique I presented at the 2007 Jackson Hole conference that policy rates were too low for too long leading up to the crisis; he mentioned recent work by Ben Bernanke, but omitted other papers which I brought to people’s attention. I was surprised that Charlie placed so much emphasis on studies of Fed asset purchases which simply looked at announcement effects, recalling my experience running the international division at Treasury where announcement effects in the currency markets are usually offset soon afterwards. Alan Blinder argued for a more discretionary and interventionist approach, buying more assets including private sector assets. I stressed the benefits of getting back to the rules-based Framework that Works, which is how I labeled the policy that was used effectively for most of the 1980s and 1990s. Here is my commentary. Read Alan’s when it is posted. This debate will continue.

Throughout the conference the growing U.S. government debt problem was the gigantic elephant in the room. Eric Leeper’s dramatic exploding debt charts and his plea for a more scientific approach to fiscal policy analysis made this problem crystal clear for everyone, even though public finance economists in the audience vigorously defended their approach. This debate will also continue.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

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