Federal Reserve & Interest Rates

This weekend in Dallas Texas, Federal Reserve Board members, Reserve Bank members, economists, and professors met for a conference (an economic research event) on monetary policy. One of the major subjects that are being discussed is the influence of John Taylor.

“John Taylor has had an enormous impact on how we think about monetary policy and the channels through which it affects the economy. His notion of a trade-off between the variability of inflation and of output (the Taylor Curve), his approach to modeling nominal rigidities (Taylor contracts), and his characterization of how policy has been and ought to be conducted (the Taylor Rule and associated Taylor Principle) have each had an influence that has proven to be enduring and pervasive.”

John B. Taylor has been recognized around the world for years as an international monetary and financial issue expert. He has produced extensive research on international economic policy, fiscal policy, and monetary policy. He is the originator of the ‘Taylor Rule’ which is a principal that guides central banks toward macroeconomic stabilization. He served as the undersecretary of Treasury for the United States for several years, and is now the advisory board chairman of the Dallas Fed’s Globalization and Monetary Policy Institute. He also serves at the Hoover Institution and Stanford Institute for Economic Policy Research.

Federal Reserve Board Chairman Ben S. Bernanke was in videoconference at the start of the meetings on Friday. He recognized and praised Taylor’s approach to economics. “John’s influence on monetary theory and policy has been profound,” Bernanke said.

Vice Chairman of the Fed, Donald L. Kohn gave a speech on the role of simple rules in monetary policy making. He gave three benefits to Taylor’s simple policy plan. “The first benefit of looking at a simple rule like John’s is that it can provide a useful benchmark for policymakers. It relates policy setting systematically to the state of the economy in a way that, over time, will produce reasonably good outcomes on average… A second benefit of simple rules is that they help financial market participants form a baseline for expectations regarding the future course of monetary policy … A third benefit is that simple rules can be helpful in the central bank’s communication with the general public.” Kohn also discussed the limitations of the Taylor rule, which included the fact that “simple policy rules may not capture risk-management considerations.”

John Taylor was of course among the speakers, along with Richard Fisher the President and CEO of the Federal Reserve Bank of Dallas, and, Edward Nelson (an Economist of the Federal Reserve Bank of St. Louis.

The conference continues until this afternoon.