Getting back on track: macroeconomic policy lessons from the financial crisis

This article reviews the role of monetary and fiscal policy in the financial crisis and draws lessons for future macroeconomic policy. It shows that policy deviated from what had worked well in the previous two decades by becoming more interventionist, less rules-based, and less predictable. The policy implications are thus that policy should “get back on track.” The article is a modified version of a presentation given at the Federal Reserve Bank of Philadelphia’s policy forum “Policy Lessons from the Economic and Financial Crisis,” December 4, 2009. The presentation was made during a panel discussion that also included James Bullard and N. Gregory Mankiw.Macroeconomics ; Financial crises

Monetary policy and the long boom

This article is a reprint of a lecture - given in honor of Homer Jones - that examines the causes of the Long Boom. John B. Taylor defines the Long Boom from 1982 to the present - as the period of time in which the United States has known unprecedented economic stability. This period includes the first and second-longest peacetime expansions in American history, separated by one relatively short and mild national recession. Taylor explores the internal changes in the structure of our economy, as well as external shocks and economic policy. He also discusses the reasons for the change in monetary policy. Monetary policy, he concludes, deserves most of the credit for the Long Boom because current policymakers have been more aggressive in responding to inflation, thereby keeping inflation low and recessions relatively rare. Taylor shows that the type of monetary research encouraged by Homer Jones at the Federal Reserve Bank of St. Louis placed renewed emphasis on the difference between the real interest rate and the nominal interest rate. This type of research sought numerical guidelines for using monetary statistics to make policy, and was responsible - at least in part - for changing monetary policy.Monetary policy ; Economic conditions - United States ; Business cycles

Does the Crisis Experience Call for a New Paradigm in Monetary Policy?

This paper shows that the monetary policy paradigm that was in place before the financial crisis worked very well and that the crisis occurred only after policy makers deviated from that paradigm. The paper also evaluates monetary policy during the financial crisis by dividing the crisis into three periods: pre-panic, panic and post-panic. It shows that the extraordinary measures did not work well in the pre-panic or the post-panic periods; instead they helped bring on the panic, even though they may have some positive impact during the panic. The implication of the paper is that the crisis does not call for a new paradigm for monetary policy.financial crisis, monetary policy rule, Taylor rule, quantitative easing

The Mayekawa Lecture: The Way Back to Stability and Growth in the Global Economy

This paper was presented at the 2008 International Conference, gFrontiers in Monetary Theory and Policy,h held by the Institute for Monetary and Economic Studies, Bank of Japan, in Tokyo on May 28-29, 2008.

The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules

This paper shows that different models of the monetary transmission mechanism lead to surprisingly similar choices about monetary policy rules. In particular, simple rules in which the interest rate reacts to inflation and real output seem to be robust to many different views about how monetary policy works. In models of small open economies—where the monetary transmission mechanism has a relatively strong exchange rate channel—the policy rule should also adjust to the exchange rate, but the gains from such exchange rate rules over rules that react only to inflation and output are small. The results suggest the need for more research on both the effect of exchange rate fluctuations and on policy rules that take account of exchange rates.

The Role of Expectations in the Choice of Monetary Policy

This paper reviews and contrasts different views about the role of expectations in policy research and practice. Recently, two widely different views seem to have dominated the analysis of policy questions.One view, which is referred to as the "new classical macroeconomic"view, is that expectations overwhelm the influence of monetary policy.The other view, which is referred to as the "Keynesian" macroeconomic view, is that expectations are unimportant because people do not adjust to expectations of policy change. The paper argues that both these views are misleading. It advances a new view of the role of expectations that is still emerging from current macroeconomic reearch. The new view recognizes the importance of contractual arrangements which prevent a modern economy from adjusting instantaneously to policy changes, even if they are expected. But it also emphasizes that forward-looking expectations influence how these arrangements are set up and how they evolve over time. Recent criticisms of this new view are reviewed, and examples are given to illustrate how quantitative methods that incorporate this view can be used in practice.