Sections 1-3
What’s the difference between the Taylor rule and Revised Taylor rule?
coef on the output gap is 1.0 as opposed to 0.5 (in the simple taylor rule)
Burns stated that what two things are NOT incompatible?
Price stability
Full employment
What is the appropriate response to the inflation problem created by ‘‘following’’ the Taylor rule?
policy should have been considerably tighter. The deviation from the Taylor rule in the early 1980s and the policy tightening associated with the Volcker disinflation
What are 2 lessons we learn from this history?
The dismal economic outcomes of the Great Inflation could be attributed to an unfortunate pursuit of activist policies in the face of bad measurement
Activist stabilization policies such as the Taylor rule, may not accomplish the stabilization of inflation and output which are often associated with them.
What are the two main questions this article addresses?
(1)How can we explain the macroeconomic policy failure of the 1970s? (2) How can such failures be avoided in the future?
Taylor claimed what two policy mistakes?
1960’s-70’s = excessive monetary ease
1980’s = excessive monetary tightness
What was the focus of economic policy in the 1960's?
Emphasis on maintaining full employment
What are the 2 alternatives that are based on the specification of the original Taylor rule? How are they different?
Inflation targeting rule - Drops the output gap
Natural growth targeting rule - replaces the gap with its change over 4 quarters
Looking at all the charts in figure 1, what conclusions can be made about inflation, output gap and federal funds rate if the taylor rule was followed?
Inflation would not have been nearly as high
The output gap would not have been as negative as it was
The fed funds rate could have been a lot lower
What interpretations do these 2 counterfactual simulations offer (Figure 4)?
Deviated from rule
Followed rule
What is the first problem when analyzing taylor’s claims about policy mistakes?
policymaker has accurate information regarding the current values of inflation and the output gap when setting the interest rat
Advocates of activist monetary policies state what about the rules?
They yield substantial stabilization benefits but simultaneously maintain a discipline.
Which rule produces the best results for both inflation and output stability?
The Revised Taylor Rule
Looking at figure 2, graphs 1 and 2, why is there a drastic difference between real-time and the final measurements?
Mismeasurement caused the drastic differences between them
Provide 2 reasons why the output gap was mismeasured.
mismeasurement of actual and potential
What is time inconsistency?
Not following through a decision.
What is the Taylor rule?
a proposed guideline for how central banks, such as the Federal Reserve, should alter interest rates in response to changes in economic conditions
What is NAIRU and what was the estimate in 1961
non-accelerating-inflation rate of unemployment; the estimate was 4%
Looking at figure 2, what were the two errors made in the mismeasurement of the output gap?
The measurement of actual output
The measurement of potential output
what is the taylor rule equation?
I=R∗+PI+0.5(PI−PI∗)+0.5(PI−PI∗)
When explaining previous policy mistakes, why can’t current estimates be used?
Due to updates of data creating mismeasurements.
What was the policy prescription when using revised (final) data vs. policy prescription when using real-time data?
because policy must have deviated from the sensible prescriptions suggested by the Taylor rule and was instead systematically too easy
because policy must have actually followed a strategy indistinguishable from the Taylor rule!
Due to Burns’ encouragement in 1971, what did President Nixon impose on the economy? Did this resolve the inflationary situation?
Price controls, it did not resolve the problem, but made it worse
Who is John Taylor?
professor at stanford
Who was Arthur Burns?
FED chair