… with Taylor Rules you easily “catch pneumonia”. It was a pity that in his testimony before Congress Bernanke did not take the opportunity to discuss alternative rules for monetary policy. Instead we saw a spectacle of “you said I said…I didn´t say what you said…” revolving, again, around the “correct” value of the policy interest rate.
Taylor, who seems to be openly campaigning for the “top job” was quick to pound on Bernanke in his blog. The “debate” was also the subject of an article in the WSJ. This post takes a more nuanced view of the “usefulness” of Taylor Rules.
Recently I half-jokingly said that Taylor Rules should be “outlawed”.
The (IT)^2 (Inflation Targeting accomplished through Interest Targeting) has proved to be of little use, even dangerous, when the Central Bank botches its job and lets nominal spending take a dive, as it did after early to mid 2008. As Scott Sumner argues, “Inflation Targeting is a Very Bad Idea”.
And the older debate, which revolves around the Fed´s responsibility for the financial crisis, linked to the “too low for too long” policy rate in 2002 -2004, is still going. This just published piece by the Reinharts, argues for the “minority view”.