Whither the Taylor-rule?

Via Saturos I went to Mankiw´s blog which published a note by Larry Ball. Larry “fiddles” with parameter values on the Taylor-rule and arrives at whatever conclusion he wants. So much for the usefulness of Taylor-rules.

But what got me thinking was his last paragraph:

It is not clear whether the Fed’s announcement of future dovishness will have significant effects today. The efficacy of announcements about future monetary policy is unproven.

It´s not “unproven” because it has worked in the past. I´m thinking of 2003 in particular and the statement of the August FOMC meeting which said:

The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period.

And even though the FF rate remained at 1%, the economy turned up.

More details on this can be seen in this post.

But now, more than “forward guidance-cum-thresholds” was needed. Guess what?

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2 thoughts on “Whither the Taylor-rule?

  1. Thoughtful blogging.

    I like the idea of guidance, but in America we say, “money talks.”

    The Fed should engage in very aggressive QE until it sees results. The Fed can talk all it wants about keeping rates at zero, but rates are already at zero and doing nothing.

    But $150 billion in bonds every month, and see what happens.

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