Krugman lectures Taylor on his rule

5 May, 2015 at 16:50 | Posted in Economics | 2 Comments

6-Oct-2010-taylor-rule-equationIn fact … Taylor’s central claim about the alleged errors of monetary policy is bizarre. 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.

Paul Krugman

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  1. How does this rule work if changes in i have no decent impact on y – y* ? Does for example the central bank just keep pushing i down and down. One suspects that in practice they tend to adjust their estimates for y* in response to this.

    In fact this doesn’t seems to be a very good rule for describing central bank behavior anyway.

    • The Taylor Rule is nonsense. What are “normal times”? No such thing. Not for historians anyway. Krugman may think that the Great Moderation was a “normal time”. But almost certainly things were building up during this time leading to events in 2007-8. The Taylor Rule is not a sensible way to think about macro-policy or as a basis for central banks to make policy decisions.


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