Tuesday, November 3, 2009

So, What's the Problem?

This is amazing.

If you look up "Taylor Rule" in Wikipedia, this is what ya get:

In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the by U.S. economist John B. Taylor in 1993.

There's more, but I got scared off by that big, ugly formula.

Well check it out! it also says this:

Uses of such a rule include systematically fostering price stability and full employment in reducing uncertainty and increasing credibility of future actions by the central bank

This is totally amazing. The inflation problem is solved. The unemployment problem is solved. Plus, problems I don't even know about: The uncertainty problem is solved. And the credibility problem is solved.

The only problem that remains? Idiots. Either the people that use the Taylor rule, or the ones who posted that joke, or me for not getting it. Pro'bly me.

1 comment:

The Arthurian said...

SE says:

Several economists have recently used the Taylor rule to comment on the appropriateness of monetary policy (Rudebusch, Calculated Risk, Krugman, Altig).... They find that the fit of this equation over the last 20 years has been quite good, and that therefore, monetary policy has been appropriate.

Rudebusch says:

A rough guideline for setting the federal funds rate that captures the Fed's behavior over the past two decades is provided by a simple equation.... The estimated Taylor rule can also be used in conjunction with economic forecasts to provide a rough benchmark for calibrating the appropriate stance of monetary policy going forward.

Calculated Risk (quoting Bloomberg) refers to:

...the Taylor Rule, a pointer for finding the correct level for interest rates... The formula is designed to show the best rate for spurring growth without stoking inflation.

Krugman says:

The Rudebusch version of the rule is: Target fed funds rate = 2.07 + 1.28 x inflation - 1.95 x excess unemployment
This rule describes past Fed policy quite well. Applied to current data, the rule says that the Fed funds rate should be — drum roll — minus 5.6 percent. You can’t do that, of course, so we’re very hard up against the zero lower bound.

Altig says:

If you are of the opinion that interest rate policy was good through the late 1980s and 1990s, then there seems to be a good case the FOMC was just sticking with "proven" success as it set interest rates through the dawning of the new millennium.


Along in there somewhere, I realized that the Taylor rule is an indicator. If it's pushing five below, you have to know something weird is going on.

Not a rule of thumb. Not a guideline. Not a pointer. I'd call it a warning. We're in deep doo.

One of the reasons we're in deep doo? The people we depend on, depend on rules of thumb.