Wednesday, May 6, 2015

Krugman Correct on the Taylor Rule (But there is a problem)

Paul Krugman gets it mostly right about the Taylor Rule, when he writes:
[John] Taylor seems intent on selling his rule as the Veg-O-Matic of economic policies. It slices! It dices! It solves the problem of the zero lower bound! (As Yates says, this claim appears incomprehensible.)...

.The Taylor rule was and is a clever heuristic for describing how central banks try to steer between unemployment and inflation, and perhaps a useful guide to how they ought to behave in normal times. But it says nothing at all about bubbles and financial crises; financial instability is impossible in the models usually used to justify the rule, and the rule wasn’t devised with such possibilities in mind. It makes no sense, then, to claim that following the rule just so happens to be exactly what we need to avoid crises. It slices! It dices! It prevents housing bubbles and stabilizes the financial system! No, I don’t think so.

As I said, it’s all very sad.
The only problem is that Krugman wants to replace Taylor's Veg-O-Matic policy prescription with what must be considered his own late night crazed money printing monetary policy prescription that matches up well with, say, Tongkat Ali Long Jack promoter claims.

-- RW

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