This paper explains John Taylor’s view that if only central banks committed to monetary policy rules, international monetary disorder, and indeed large-scale capital flows, would be eradicated.
It’s an extension of his earlier argument that the US’ financial crisis and recession was caused, predominantly, by a departure from the Taylor Rule for monetary policy, and by fiscal uncertainty.
I didn’t find the earlier arguments convincing, and this one doesn’t persuade me either, for related reasons.
This new contribution repeats a problem with the original one, the contention that monetary policy was too loose in the early 2000s. This was dealt with convincingly by Bernanke in 2010. The Fed set rates pretty close to a ‘forward-looking’ Taylor rule in which one inserts not current, but forecast inflation. Very low rates back then was to head off forecast deflation.
The proposal amounts to assuming away one aspect of the problem. …
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