A Celebration in Honor of John Taylor

>> John H. Cochrane: Welcome everybody, to the John Taylor celebration. I can't find Taylor. Where did he go? There. There's the man. As a co-organizer with Michael Bordo. There's Mike Bordo. I get to be the first to say, thank you John, and congratulations. This is a wonderful event. I want to say thank you of course, to all the wonderful Hoover staff who did almost all the work, especially Marie Christine Slakey.

 

Marie Christine, wave. Hi. See, she's working already back there. Who did really the hard work. Rules of the game. Everybody who's on the program, watch the time, please. Start on time, end on time so that everybody gets a chance. We will have Q and A, but it doesn't have to be a question.

 

It's okay to just offer some remarks. Moderators, help us get, get all of that going. When you say something, please identify yourself. We're keeping a transcript and it's awfully nice not to have to spend weeks saying, now who was that who said, John, I love you. Well, we all love John, so how do I know who said that?

 

So please identify yourself. We're going to get going with a few opening remarks by our university president and ex economist, well, ex member of the Economics department, still an economist. Sorry about that, John. John Levitt, please.

>> Jonathan Levin: All right, thank you, John, and welcome to everyone. It's a pleasure to see so many friends here to celebrate John Taylor.

 

Welcome to the Taylor family. Thank you to the Hoover Institution for organizing this event. We're going to hear a lot this afternoon about John's research contributions and his legacy in monetary policy and macroeconomics. So I wanted to open with a few words about John's many years at Stanford.

 

John first came to Stanford as a PhD student in the economics department in the late 1960s, early 1970s. His advisor was the great statistician and econometrician Ted Anderson. And some of John's earliest work was on econometrics and statistical properties of dynamic economic models. We sent John off to Columbia and then to his undergraduate institution, Princeton, where he established himself, as you'll hear soon, as one of the leaders in macroeconomics, doing his work on rational expectations and then providing the foundations for New Keynesian models with the development of the staggered wage setting model.

 

And then happily, we brought John back to Stanford in 1984. And so he has now been on the Stanford faculty for more than 40 years as a pillar of the Economics Department, the Hoover Institution and the university. And in addition to his extraordinary stature in monetary economics and policy.

 

So when I was preparing these remarks, I Tried to recall the first time I met John. And I somehow had a memory of first meeting him and Michael Boskin in Washington in an elevator in the Old Executive Office Building, and that they had both been very gracious to me at the time.

 

And that kind of made sense because when I was an undergraduate at Stanford, I had spent a quarter in Washington at the Stanford and Washington program and I had been an intern at the Council of Economic Advisors. And that was where John and Michael were both members of the Council.

 

And it was around the same time. But then last night, as I went to verify that story, I realized that it might have just materialized in my mind because by the time I got there, John had actually returned to Stanford. So either John was there visiting at the tail end of the Bush administration, which is very possible, or Michael loomed so large in my mind that he had just sort of stood split into two people and made a big impact on me.

 

But in any event, one reason the memory sort of made sense was because, as I later came to appreciate, John was unfailingly kind to Stanford undergraduates. And in fact, when he returned to Stanford from being at the council in the 1990s, John built a major teaching center at Stanford in introductory economics.

 

John taught thousands, probably tens of thousands of Stanford freshmen to love economics and to love markets. He was famous for dressing up every year as a raisin. There was an economic point about raisins, something I think, about agricultural markets and so forth. But mostly everyone just remembered that he dressed up in a raisin costume and looked forward to that all quarter in his Econ 1 class.

 

And he also advised dozens of undergraduates and undergraduate theses. And actually quite a number of his students went on to become professional economists or to the great success in the public and private sector. Of course, as you're going to hear later today, John's also deeply respected here on campus and elsewhere as a scholar and policymaker.

 

I would say that John's development of the Taylor role is, you know, would be in probably in my top five contributions in the field of economics in terms of the impact that someone has had on practice of policy, maybe up there with Black, Scholes and I'm not quite sure what else is in that top five, but truly extraordinary contribution for any economist.

 

And his contributions to public service through the CEA. His time as undersecretary of the U.S. treasury for international affairs, as a member of many advisory committees at the state and federal level, are equally laudable and meritorious. And finally, John has been an exceptional colleague to me. And to many others here at Stanford.

 

When I returned to Stanford in the summer of 2000 to join the Stanford economics faculty, John was already at that time, very firmly established as one of the most distinguished professors in the economics profession and of course, here on campus. And what I discovered very quickly and happily was it turned out that just as it was true with the Stanford students, John was unfailingly kind to young members of the Stanford faculty.

 

And John and Elyn had Amy and I over almost right when we arrived to their house for dinner. Of course, was a dynamo owner, owned. Right, I spent many years with her on the Stanford homeowners board. And it was immediately clear, just from the first month that I had at Stanford, that John was someone who was gonna be kind and generous and supportive.

 

And indeed he has been for 25 years. John can be very opinionated sometimes about monetary policy. He's not afraid to mix it up. I don't doubt that some of you in this room have been on the other side of him on the occasional debate about government bailouts or interest rates or, you know, other aspects of policy, where John has thought deeply and has a lot of conviction and expertise.

 

But as a colleague, John was also. Is also someone who was a great listener, someone who had wisdom and experience, someone who would always step up to help, someone who loved Stanford and wanted to see the institution and our students thrive. When I was the Economics department chair, we had a lot of characters in the Economics department.

 

And I would, yes, including some people in this room. And sometimes I would have to go make the rounds of the department to sort of line up a meeting or a vote or something we were trying to do. And there were some offices that I would sort of pause outside and have to sort of steel myself before I walked in because I knew that it was going to be a fierce debate, by the way, I kind of look forward to those, but I always really look forward to walking to John's office.

 

And the reason I did that is because he would always have questions. He would have insights about things. He always wanted to think hard about things, but at the end of the day, he always wanted to know what was going to be best for the department and for the university and how could he help make that happen.

 

And he's just a great colleague. And I think that's why he has so many people who've worked with him over the years who have just come to admire him in a very deep way and respect him and befriend him, and not just for his scholarship but for his character and his integrity.

 

So thank you all for being here today to celebrate John and John's legacy.

>> John Cochrane: We have a special treat and a secret. Mike Boskin will reveal the secret.

>> Michael Boskin: So, John, not everybody who wanted to be here could be here today. So I have for you a special letter. And I'll read it. It's addressed to you care of me, but that's another story.

 

Dear John. John, Policymakers around the world and the entire economics profession have benefited from your path breaking contributions in the era of monetary policy, the Taylor Rule has become an international benchmark in the practical analysis of central banks interest rate policies. Since the mid-1990s, the prescriptions for the federal funds rate implied by versions of the Taylor Rule have been a staple of the briefing materials the Federal Open Market Committee members receive at each meeting.

 

A presentation of the Taylor Rules policy prescriptions appears in the Federal Reserve's Monetary Policy Report to Congress. You've been an active participant in discussions of current policy issues as an academic for over half a century. I also applaud that you took time away from academia on multiple occasions to provide distinguished service in government, including at the Council of Economic Advisors and at the US Treasury.

 

On behalf of the Federal Reserve, I'd like to thank you for your outstanding achievements in economic research, teaching and public service. Congratulations on the recognition from your friends, students and colleagues at the proceedings being held at the Hoover Institution this week. On a personal note, I have so benefited and enjoyed the many conversations we've had over the years.

 

Sincerely, Jerome Powell.

>> John Cochrane: Next we have an introduction and overview. Mike Bordeaux and John Hartley and myself are writing a overview chapter. We intend to poach a lot of what you have to say later on in the afternoon, but we also have some of our own thoughts. Mike will present.

 

 

>> Michael Bordo: Welcome everybody. So what we're doing is just an overview of John's contributions to economics. Our talk is really just a sort of a preview of the events of later today. So we're just skating the surface and then the details will be filled in by all the rest of us, the participants.

 

So John Taylor is one of the greatest and most influential economists of the past 50 years. His contributions transformed economic thinking and monetary policy making. So I'm just gonna list and not going through this, cuz everybody else that's following following is gonna talk about it. But these are some of his major contributions.

 

He's done incredible work in macroeconomic theory way back in the 70s and the 80s. On the work that was going on rational expectations and econometrics and macroeconometric modeling, policy modeling, okay. He was an innovator in creating these staggered wage contracts which in a sense gelled with the rational expectations approach to allow central banks to use their policy tools to affect the real economy.

 

And that became a building block of what later became the New Keynesian model. And then of course, the Taylor Rule. And that of course is going to get a lot of attention today that has been used by all central banks. He developed it, he developed a systematic framework for monetary policy which is prominent today.

 

He's done a lot of work in international economics on international policy interdependence. And a key implication of all this is if you follow the Taylor Rule, you're not going to have spillovers to other countries that every country follows the rule that the whole world would be better off.

 

He's done work on fiscal policy and on major policy issues, okay, John warned of the GFC, the global financial crisis back in 2007. And in a path breaking paper which I'll talk about in a minute, he critiqued the policies that led to the GFC and then the following stimulus packages, QE and slow recovery.

 

And then John was a skilled policymaker. He was at the CEA and then he was in the Treasury. So this is a timeline of John's events. I'm not going through all this. This documents his academic achievements, his years here as an undergraduate at Princeton, grad student here, back to Princeton to Columbia and back, and then all the great papers he's written and then these contributions to public policy.

 

So this is a timeline which people can look at just to get a picture of the enormous scope of achievement that he's had. Okay, and of course, what everybody talks about is the Taylor Rule. We're going to hear a lot about it in a few minutes. I'm just going to skate the surface.

 

The Taylor Rule is a monetary policy guideline that prescribes how a central bank should adjust nominal interest rates based on deviations of inflation from the target and of the output gap, which is the difference between the actual end and top potential gdp. This is the equation. Other people are gonna go through it.

 

This equation was a masterpiece. It had great impact for the policy framework. The Taylor Rule uses the interest rate to control inflation while allowing countercyclical policy. So it deals with the dual mandate. It stems from earlier rules from the gold standard, which is something I've always been working on from Milton Friedman's K percent rule.

 

Okay, and these were earlier rules for predictable policy, for monetary policy. His rule establishes a strategic guideline for conducting and evaluating monetary policy and evaluating monetary policy that avoids discretionary policy mistakes. It provides critical information about how the central bank will respond to future inflation and economic conditions.

 

It enhances communications and transparency. And above all, it's easy to understand by policymakers. And what comes out of the Taylor is the Taylor principle, which says that central banks, if they're trying to stimulate the economy, they should raise interest rates. They should sort of try and deflate the economy.

 

They should raise interest rates more than one for one, when inflation rises to affect the real interest rate. And theory, there's a lot of impact on theory. The Taylor rule performs extremely well in a wide variety of models, okay, robust to how imperfect the models are. And it's ongoing.

 

There's all this debate about what's the best rule. Do we look at inflation? Do we look at the price level? Do we take into account slow adjustment? Do we include the exchange rate? John's very clear on that one. He says no. Okay, what about R star, the natural rate, how do you deal with that?

 

How do you deal with supply shocks? But the key message that comes out of all this is you keep it simple, transparent, and accountable. Now we're gonna show you just some evidence on his impact. So these are John's most cited papers. There are six papers. They include the two staggered wage papers and the Taylor rule papers.

 

The thing to note is this huge hump that starts in the 90s, and that's the Taylor rule, okay? This is just the two Taylor rule, big Taylor rule, Papills 1993. You can see how enormous the impact is. This relates to what Chairman Powell said. This is the impact that the Taylor Rule had on the fomc.

 

You can see how often it's mentioned in FOMC transcripts. And we don't have time for this, but we looked at other countries. Other countries also do the same thing. So it's had tremendous impact on the US and the rest of the world. Okay, John, he really was active in the public policy debate, and the press really took heed of him.

 

This is just showing the pattern of the op EDS that he's had over the years. It tells you where they were. Financial Times, Wall Street Journal, economist, et cetera. Okay, now I just want to talk a little bit about the international side, which is kind of what I've been interested in.

 

And the questions he asked was, should central banks react to exchange rates or foreign interest rates? And he basically argues no, actually, they should focus on their own domestic knitting. He says as long as they follow domestic inflation and unemployment, they're fine. And that view is pretty standard in a lot of large country central banks and even some smaller ones.

 

John talked about something called the Great deviation that occurred at the beginning of the 21st century when Central banks, the Fed first kept interest rates too low, then followed QE and then had spillover effects on the rest of the world and led to what he called the global Great deviation.

 

He's also talked about the IMF and IMF reforms and one of the things he's pushed is that they should help the emerging countries that the fund in adopting rules based policy and really avoid using capital controls. My last topic here is this. John was really heavily involved in the analysis of the, of the global financial crisis.

 

In a paper he wrote for the Jackson hole conference in 2007, he argued that the debt financed housing boom really was a consequence of the Fed keeping interest rates too low for long. This picture which comes from the Economist shows this big gap between the Taylor rule rate and the actual rate.

 

And he warned of what was going to happen. He warned what was going to happen in that paper, okay? And then after it did happen, he was oppression critic of the Fed and the administration's policies throughout the GFC and the slow recovery. And in this period he wrote a seminal paper with John Williams which looked at interest rate spreads and to sort of ask the fundamental question, in a crisis, is it a liquidity event or a solvency event?

 

The Fed believed it was a liquidity event. And what they used, what they established in the Fed in December 2007 was the TAF, the term auction facility. And what John shows, what the two Johns show is it had very little impact. Okay, later he criticized the bailouts of Bear Stearns AIG.

 

He was very critical of the TARP when it first came out. In fact, he argued that it was a TARP that increased the policy uncertainty that turned the crisis into a really deep recession in 2008. And he was a strong critic of the fiscal stimulus packages in 2009.

 

He said they would be transitory. The evidence turned out to back him. And then in the slow recovery period he was very critical of the use of QE and forward guidance. He saw these as significant deviations from rules based policy. Exchange rates permitted Fed policies to transfer abroad.

 

Okay, last thing is, John was in government. He was in the CEA for three administrations. He was Under Secretary of the Treasury, okay, from 2001 to 2005. In these critical years he formed a team at the treasury to deal with the crises that went on. He dealt and he used his rules-based approach.

 

He dealt with the creation of a new currency for Iraq, Saddam Hussein's odious debt, the financial reconstruction of Afghanistan, the Argentine debt and currency crisis of 2001, IMF reform. He was a great fan of collective action clauses Barry Eichengreen here has proffered, and he was in favor of market based reforms for the imf.

 

So I will stop there.

>> Andrew Levin: I'd like to start by saying that we owe a huge debt to Michael Bordo and John Cochrane and to many others who organized this conference. Marie, Christine, hopefully many of you know her. She's been amazing for at least two decades that I've known her and working behind the scenes and making this kind of conference possible.

 

And of course, to Hoover. Other people are going to talk a lot today and probably even tomorrow about John's research. So what I thought I would do in just starting this panel is to give a few remarks about John as a person. And it turns out some of this actually will echo things that Jonathan Levin said a few minutes ago.

 

I was thinking about adjectives that describe John Taylor. One of them is modesty. I'm not sure he would have actually. He would have never organized a conference like this for himself. There are other people you probably know who would be happy to organize their own and pick all the people who would say wonderful things about That wasn't even needed today.

 

Because I think that what we can see from this group, and people online, too, probably, is how many really loyal friends and colleagues and fans John Taylor has over his career, many, many decades and former students and others. So that modesty, I think, is an obvious quality. Another obvious one that you heard in Jonathan Levin's remarks was sense of humor.

 

I just don't. I teach at Dartmouth, by the way, and I have a lot of great colleagues who are just amazing teachers. I don't think any of them have ever dressed up as a raisin and other things. There's a story, maybe some of you know it, you'll hear about it later, that John would sometimes in his class, he would have his daughter come and she'd sit in the front row, and at some point in the lecture, she would start raising her hand and interrupting him and arguing with him.

 

And the students were a little puzzled at first, but eventually it kind of became clear that this was kind of a stage. But as a way, because John's a devoted teacher, this was a way of engaging the students. And so he has just incredible numbers of students over many, many years that have been inspired and partly by his sense of humor and his wisdom.

 

Okay, so the two qualities that I thought of as most characteristic and most remarkable about John, one is kindness that you heard from Jonathan Levin. And so, I'll just emphasize that a little bit further. And the other is courage of his convictions, which I think we heard a little bit from Mike.

 

And so maybe I can expand on that. But what I would like to end up with. I got to keep my remarks to just a few minutes. Here is what is an economist and how do we know that John Taylor's a really great economist? We got to go back to what is that word so?

 

But let me first say, in terms of kindness, I'll just give you a case study. Since we got the data, we just need a case study to go with it. So I'm a case study. I was a graduate student of John's. I took his first year graduate macro class in fall of 1984.

 

I passed the class and five years later I was a PhD student and he was my advisor. I was struggling with my job market paper. I was scared to death. We had to mail it out in a few days and John emailed me. He said, look, just come over to my office this Sunday.

 

Sorry, come over to my house this Sunday. We'll sit down and we'll look at your paper. So I came over at 2 o' clock, beautiful afternoon, late today. And we sat in the garden outside of his house for probably an hour and a half going line by line.

 

And I know there are other advisors who do that with their dissertation students, but John, I'm just immensely grateful ever since that degree of kindness that you showed, not just to me, but to many, many others. Okay, what about the courage? I think what Mike didn't completely capture, you see it in that graph he showed you about citations, is that during the 1980s was the real business cycle era.

 

Kendall and Prescott and Charlie Plasser and others doing amazing work in developing new models, what we now call DSGE models, but they're called real business cycles because money and monetary policy didn't have a role. And John was almost unique in continuing to work on models where monetary policy was important and to train PhD students like Volker Wieland and John Williams.

 

And there's a bunch of others who are here. I don't want to list them all. And that was really important and it was courageous because John didn't just go with the flow of the mainstream of the profession at that time. Likewise with nominal wages. When I was doing my job market paper, which was on staggered nominal wage contracts, there were other people who said to me, that's ridiculous.

 

Wages are not allocated. Nominal wage stickiness doesn't matter. I was discouraged. Fortunately, John encouraged me to continue with it. Here we are, what, 40 years later. Nominal wage rigidity is a critical part of many macroeconomic models. It's just another kind of element of courage of his convictions. I can't go through all the other examples Michael Wardo mentioned to you, I think we'll hear more about them today.

 

But the combination of kindness and courage is rare. It's rare. There are a lot of people who are kind and timid, and there are people who have the courage or their convictions, but they're very blunt and kind of difficult. I may be one of those. But John is amazing because he has that combination of the kindness and the courage of his convictions.

 

Okay, so what about the word economics or economist? It's not Adam Smith who invented that, that word. It comes from a Greek word, oikonomos. So I was just doing some checking the last couple days, that word was used in Plato's Republic. Pretty amazing, isn't it? The word, what it meant in Greek was a steward, a trustee.

 

And so Plato's Republic talks about what are the characteristics of a good trustee, a good steward. Of course, they're kind to the people who work for them or work with them. They're careful, they're respected, they're trustworthy. There's great philosophers. I can't list them all. But in the Greek literature, talking about this for hundreds of years, what makes a really good steward?

 

Then fast forward a little bit. The rabbis are translating the Hebrew scriptures into Greek, and they use oikonomos for Joseph. The story of Joseph in the Bible, Remember one with the rainbow color coat because he was the one who worked with Pharaoh when there was the famine and the feast to make sure people didn't starve.

 

And so the rabbis call him the good steward, the good oikonomos. And then fast forward a little further. Jesus talked about stewardship in his parables. In one of his parables, he says, who is the good and faithful steward? Of course, in Greek, who is the good and faithful?

 

Oikonomos. So I just want to end these remarks to say we all know an amazing steward, an amazing economist, a great economist, a kind economist, a courageous economist, a wise economist, a trustworthy, respected economist. They're so thankful for that ability to interact and engage with John over these years.

 

I just want to say an applause to John, thank you.

>> Andrew Levin: And so with that, we have three really, really distinguished speakers on our panel. We're gonna go in alphabetical order, and I'm not gonna do some because, all of them already, but Robert Barrow will start.

>> Robert Barro: Thank you.

 

So I wanted to Begin with a previously untold story of how I owe my position at Harvard University to John. So, in 1983, John was a professor of economics at Princeton, and he got an offer of a senior macro position at Harvard. And John was having a tremendous amount of difficulty deciding what to do, particularly whether or not to accept the offer from Harvard.

 

And he kept going back and forth. At some point, he actually bought a house near Harvard and purportedly also accepted the offer at some point, but then changed his mind. So there was a popular joke at the time where you would show a graph of a variable bouncing back and forth between two poles with rapid frequency.

 

And then the question was, what does this graph represent? And the answer was that it's a Taylor series. Anyway, John ended up actually turning down the Harvard offer. And moreover, he didn't stay at Princeton, but instead he moved to Stanford in 1984. And I don't really know about that part of the story.

 

John will have to explain how that was the outcome from this process. But not long after this, the next year, in 1985, I got a phone call from my previous thesis advisor at Harvard, Zvi Grylikas. And he said, you know, we think it's time for us to bring you out of the wilderness, by which he was referring to my position at the University of Rochester at the time and bring you back to Harvard.

 

And he said, we're thinking, how about if you visited Harvard for a while, and then we hope that we can make that into a permanent offer? And he says, you know, we can do this because John Taylor recently turned down our senior macro offer. And he said, well, would you be interested in this?

 

And I said, yeah, that sounds like something good. I would be interested in that. And then Zvi said to me, said, well, you know, we've decided that we're going to offer this visiting position first to Tom Sargent. And he says, well, suppose Tom turns us down, would you then be interested in this arrangement?

 

And then I was getting kind of nervous about this approach and I said, well, that might work out. And then Zvi says to me, he says, well, you know, we've decided that if Tom turns us down that we're going to offer this position to Bob Shiller. I'm not making this up.

 

And then he says, well, I'll get back to you. He says, now, after this kind of inauspicious beginning, the surprising part of all this is that it actually did work out in the end. I don't know what happened with Tom and Bob, but I actually did end up visiting at Harvard in 1986 and accepting an offer there in 1987, where I've been ever since.

 

So thanks, John. It was your decision making that facilitated this position for me. Now, it's already been noted that John's Taylor Rule contribution is a celebrated landmark in economics. It really appears in three major places. One is it's often a component of standard macroeconomic models, for example, a piece of the New Keynesian model.

 

Some people think the New Keynesian model is a worthwhile model. The second thing is that the Taylor Rule is influential in terms of monetary policy, the actions of central banks. And the third thing is it's basically a positive theory about how nominal interest rates will behave in a reactive manner to what's going on in the economy.

 

And overall it fits remarkably well over a long period of time. Now, there was a massive deviation from the Taylor Rule in the COVID period, really from 2020 onwards through about 2023. And this applies not just in the United States, but also to the OECD area more broadly.

 

Basically, the adjustments of interest rates upward in response to the surge in inflation was very much lagged and therefore was thought to have facilitated the surge in inflation, which cumulated to a price level jump of something on the order of 10, 15%, depending on which country one is talking about.

 

Now, the standard view is that this deviation from the Taylor Rule was a big mistake, an error from the Federal Reserve and central banks more generally. But in our current research, we're really taking a different viewpoint with respect to this interval. And we think that you can think about the surge in inflation as a part of a state contingent fiscal policy, which if you look at it that way, it's not completely crazy.

 

Basically, what you had was a vast expansion of government expenditure, mainly in the form of transfer payments. Now, that in itself was probably a big mistake, but if you take that as given, which is what I want to do here. It's basically analogous to a wartime situation, a kind of emergency macro environment.

 

And then the question is, what would you want to do with respect to inflation in that context? So basically, you have to pay for the large increase in expenditure that occurred, and there are only a certain number of possibilities of how you can pay for it. The obvious things are to raise taxes either now or later, or to cut other forms of government expenditure, either now or later.

 

That would respect the government's intertemporal budget constraint. But there is a third possibility, which is that contingent on this emergency, and the analog, again is wartime, you can effectively default on part of the public debt. And that's another way to pay for stuff in a manner that. Does respect the government's intertemporal budget constraint.

 

Now, the inflation, which was surprising from the perspective of 2019 before you got into the COVID period, essentially wiped out something like 10% or so of the real public debt. So that's a lot of revenue, in effect, generated through that channel. And of course it works because you have a lot of debt outstanding that's denominated in nominal currency units, such as the US dollar, in the case of the US public debt.

 

So another way to look at this is I'm thinking about the central bank as essentially cooperating with the fiscal authority to figure out the best way to deal with the vast expansion of government expenditure. Or you can think about it as a fiscal dominance kind of situation where the central bank is kind of forced to follow given the vast deficits coming from the fiscal side.

 

So this is a kind of response that works only if it's very much limited to emergencies, which are mostly wartime. But perhaps the COVID pandemic is something analogous. But if you looked at the long term UK experience, for example, where it was essentially on the gold standard going back to the Glorious Revolution or something close to a gold standard, there were two important deviations that occurred over that long period.` One was during the Napoleonic Wars, 1797-1821 or thereabouts, where effectively the government was able to pay for part of the wartime expenditure through inflation, and then the government also went back to the gold standard after this episode was over.

 

The second case was at the start of World War I in 1914, where the UK went off the gold standard and then never really got back to it in the classical sense that it had been before. But these were two examples of responses to emergencies where a lot of the expenditure was effectively financed through inflation.

 

Now, this approach, we argue in our ongoing research, fits the data very well. If you look across 37 OECD countries in the period between 2020 and 2023, which is the relevant period in terms of the surge in spending and the surge in the price level. Empirically, there are three things that matter a lot in trying to explain the difference in the inflation experience across this broad group of countries.

 

So the first one is just the size of the fiscal surge itself, which is not surprising. And that by itself, you would think, would produce more inflation. But maybe surprisingly, that relationship on its own, in fact, does not fit very well. Turns out. Now there are two other forces that turn out to be empirically quite important which fit with our approach of thinking about the inflation as effectively generating revenue as part of the government's intertemporal budget constraint.

 

The first of those elements is how much public debt was outstanding at the beginning. So if you look in 2019 and you look at the ratio of the public debt to gdp, if you have a lot of public debt, there's a lot of stuff that's hostage to the inflation, and you don't need a lot of inflation to generate a lot of effective revenue.

 

If you don't have much public debt, you really can't get revenue by wiping out the real value of that debt, because it's not there. So then the prediction from this approach is that the countries that start with more public debt in relation to GDP are actually going to end up with a lower inflation rate.

 

And I found that a very surprising prediction, which I thought was going to be incorrect, but it actually fits the data very well. It turns out the third thing that matters is what's the duration of the public debt? If it's very short term, the only way to get the revenue is to have extreme inflation over a short period.

 

But if the maturity of the debt is quite long, then the inflation response is going to be much smaller, and that turns out also to accord with the data. So it turns out to be true. If you bring in these three factors jointly, you get a lot of explanatory power across these 37 OECD countries in terms of the extent of the inflation.

 

And the United States ends up being basically like an average country in this group. It's not really something very special. So I'm trying to argue here that in some sense, conditioned on the expenditure, the policy, if you call it that, of having the inflation surge may not have been completely crazy.

 

Now, I find that when I propose this idea to people who I'm normally in sync with, that they tend to get very upset with that idea, and they don't accept this at all. In any case, since 2023 or thereabouts, we've pretty much gone back to the Taylor Rule framework.

 

So I think that's favorable looking forward. But at the same time, this massive departure from the Taylor Rule during the COVID period may actually not have been such a bad idea also. Okay.

>> Robert G King: So it's an honor to be here at this conference celebrating John's illustrious career. Mike and John were kind enough to sort of assign me an open topic.

 

And what I decided to do was to be a little bit of a historian of John Taylor, to go back to his earliest work and then try to trace some thematic elements. I'm going to focus on one paper in particular, an October 1979 paper in Econometrica, and that was a paper that was pathbreaking and influenced me and others of my generation pretty deeply.

 

Now, the context of that paper was that John was interested in developing operational macro theory, devising econometric strategies, balancing computational feasibility, parameter parsimony, and data consistency, with a particular emphasis on persistence. One of the thematic elements of my talk is going to be persistence. His estimated models were used to construct operational policy rules, and I'll show you the Taylor Rule circa 1980, which may surprise some people.

 

From his earliest work, he argued that rational expectations meant that systematic policy is desirable. I'll talk thematically also about systematic policy. He highlighted in various places the limitations of simple policy formulations when there are unusual shocks or shifts in policy regime. Okay, how do I flip the slides?

 

Green button, okay. Very good. So I told you I was going to take you back to the earliest days. I wanted to think about what was John like as a graduate student. And I'm particularly fascinated by intellectual connections in economics. And one of the things that I was led to puzzle over is why was John.

 

Why do I think that John was influential for me, we've never been colleagues, collaborators, I've never estimated a Taylor rule, but I found in looking back on his career, there were many places where I paralleled his training, of course, with a lag. I have to say, though, John.

 

I only wish that I'd had TW Anderson rather than his time series book. You can see in John's training as well, an interest in control. I was significantly influenced by Greg Chow's textbook on analysis and control was inspirational, I know, to Tom Sargent and to many others and I suspect to John as well.

 

So in any event, with that context, I'm going to take you back 50 years ago as a young researcher worked on a paper that he later delivered at the Summer Econometric Society meetings in Ottawa. So here's the paper. I'm going to adopt a strategy in this talk of frequently not talking to you about what's directly on the slides, but recognizing that you can read.

 

And so I've got the title of the paper and I've highlighted some elements of red where I'm trying to draw your attention to the thematic elements. And we can see in this context, John is already thinking about systematic monetary policy. Now, at the time, systematic monetary policy was widely viewed, or at least widely viewed in the wilderness of Rochester as irrelevant for real economic activity.

 

Taylor took a very different perspective. To be clear, I was one of those real business cycle evil guys that were discussed in some earlier presentations. John placed expectations at the center of his work and he wanted to estimate a small structural model of inflation and real activity and calculated an optimal monetary policy rule.

 

And ultimately, this program has revolutionized macroeconomics. It's revolutionized macroeconomics not only through the Taylor rule, but through the way in which we approach problems. If at some stage we need to come up with an alternative to the Taylor rule, then we know what the program is, we know how to think about this, and we know how to evaluate alternative rules.

 

So here's the model. It's a model that contains two equations, one for real activity and one for inflation. As I said before, John was schooled in time series analysis by T.W. anderson. And there are some very shrewd elements of this little model. There's an AR2 for output or output relative to potential.

 

And that's a pretty hard time series model to beat. There's an inflation equation for this change in inflation and it has a moving average term. And as Nelson and Schwart later showed, that's a really hard model to beat for inflation. Now John's got some additional structural elements, expectational elements.

 

His equation 2, which is his Phillips curve type relationship, has expected output in it because as he explains in the appendix to this paper, he's got a view that prices are set in advance and that relevant output gap is the one when firms are setting their prices. And this model is also shrewdly designed because it lets you use child type methods to do optimal control in the presence of rational expectations.

 

Now, the control variable in this model was the money stock. The state variables were past inflation, the past inflation error and output lags. And so the model was set up to let the researcher and its structure determine how much real stabilization, how much inflation accommodation, and so on.

 

And in this 1979 paper there are some old friends, but at that time they were not well known. There was in particular the Taylor curve, providing a trade off between volatility of inflation and real activity, a proposal to replace the Phillips curve for the purpose of monetary policy.

 

If one looks at monetary policy discussions, that replacement is pretty complete. Now, John in this picture also highlighted that US historical performance had been inefficient, inefficient in two ways. Inefficient relative to the curve, but also inefficient relative to a simple constant growth rate money rule. Now, that model was long and complicated.

 

One of the things that has been representative of John's program, we heard a little bit about this earlier, is the idea of teaching. He followed this long and complicated paper with a couple short papers in the AER that basically explained to those who are trying to learn about this stuff, and was certainly in that category, how things worked, what the critical elements were.

 

The first thing that he did was he characterized what the optimal policy looked like from this control problem. He found that one particular money growth rule dominated both the constant growth rate rule for economic stabilization reasons, but it did not involve any accommodation of inflation shocks, despite the fact that the model structure might naturally lead to an accommodation of inflation.

 

In another short paper, these papers are beautiful because they extract just the amount of math that you need and they put just the type of words around it that you need. And so it's great if one goes back and looks at this you can see John critiquing prior US Monetary policy as involving excessive inflation accommodation.

 

You can see him also struggling to try to figure out what the new regime under Volcker was going to look like. This is written in late 1981 and that's pretty much where we were now. A final thing that I want to point out which is relevant to the recent experience in the United States is that John warned that interest rate targeting could lead to excessive accommodation if the interest rate was not adjusted in the face of rising inflation.

 

And that really amplified and echoed earlier warnings that Friedman and William Poole had made about what happens if you're running an interest rate policy. Now at the time that wasn't the policy but in short order it became the instrument of monetary policy. Okay, now the next thing I'm gonna do is I'm going to fast forward to the 1990s and in particular I'm gonna look at the 1990 economic report of the The President, John, in this report brought the language of modern monetary and fiscal policy to the public document about economic policy in the United States.

 

And it contained substantial rhetoric that I find attractive. And in fact a good bit of that rhetoric was something that was invented by John. Written with Mike Boskin for the the administration of George H.W Bush. That report really makes one proud to be a certain type of economist and also highlights a path of fiscal discipline that the United States did not later take.

 

It's great reading. I recommend it to you strongly even if you're not a history buff in the way I am now. Everybody else is going to talk about rules versus discretion and that classic paper. In that paper John advances the language of systematic policy which I describe here on this slide as a kinder, generaler version of policy rule.

 

And I encourage you to go and read that paper because for people who think that John is doctrinaire, the openness to understanding the limitations of rules based policy in particular circumstances. Great discussion of what to do in the wake of a Kuwait driven spike in inflation. I'm going to close here, although I have more remarks that will be available in in printed form.

 

Just to think about the Taylor Rule in Practical policy circle circa 2007. People have alluded to this previously. There are two fantastic papers in the Federal Reserve bank of St. Louis review, one by William Poole where he talks about using the Taylor rule to understand the Fed, speak about it to the citizenry, but also makes the case that the markets had learned the Taylor rule.

 

At this time the Fed was responding to new information, the markets were responding to new information and that could make rules based policy look unpredictable. Then finally there's a very nice paper by Orphanides and Whelan talking about rules of thumb interpretation of the Taylor rule. More history available late.

 

 

>> Harald Uhlig: Yeah, I'm very proud, pleased and honored to be here. I decided to entitle my talk Standing on the Shoulder of a Giant, which John Taylor is. It's clear to everybody you know what that means. So let me use the occasion of my talk to illustrate that, reflect this out a little bit more and start by mentioning contributions that haven't been mentioned yet.

 

Namely these two important contributions by John Taylor. Why are they important? Well, they're important to me as you might be able to tell from the second author on this contribution. The first one is by John Taylor me and that appeared in the Journal of Business Economic Statistics. It was a comparison of numerical methods.

 

At the time the challenge was how to solve macroeconomic models. They were often non Linear so how to do this? And a couple of researchers had a variety of proposals out there. So Chris Sims was my advisor and John Taylor got together in NSF group I believe and got these researchers together to compare these methods and they tasked himself with comparing these, you know, these various methods.

 

They had a conference here in Stanford I believe and then there was another conference in Minneapolis at the Stanford conference that I hadn't been part of. The agreement was that all these rules, all these methods pretty much arrive at very similar solutions. And then I think it was you and Chris instigated the authors to also send in simulations and then compare the simulations.

 

So they arrived and then Chris was supposed to do the comparison and Chris then kindly had me do the comparison instead as a research assistant. So that's how I got on the project. And I'm very grateful to John that he then didn't leave the project now that Chris had failed.

 

Anyways, that paper came out and I think it has become a benchmark in the comparison of numerical methods ever since has been. There have been lots of mutations and as they say, imitation is the most sincere form of flattery. There's also this wonderful, wonderful handbook on macroeconomics and we published in 2016.

 

So I'm forever grateful to John for, for, for giving me that opportunity. There's a picture that we took on the occasion of that second handbook conference. But let me, let me go back further and time here on the, on the contributions that are the theme of this, this session which are about monetary policy and overlapping contracts.

 

And let me set the stage a little bit. This was the rational expectations revolution and I sometimes imagine what it must have been like to be a macroeconomist at the time. So Sargent and Wallace published this piece in the JP in 1975 where they said monetary policy is ineffective.

 

And the reason is that if you increase the money supply, price and wages would just increase with that one for one. And in a rational expectations world where people foresee that happening, it will have no impact on the economy. I mean that upended old style Keynesian economics, but it upended it maybe slightly too drastically because, I mean it's a benchmark result.

 

But would you really believe it? And so then Phelps and Taylor came along in their piece 1977. Mind you, there's only two year lag between, you know, that paper by Sergeant Wallace and the paper by Phelps Taylor. So I think that discussions appear in journals much more quickly which I think we have to do again, showing that the result goes away once you have prices and wages be set one period in advance.

 

And that was really, I mean, I think of that as rescuing rational expectations. So it kept rational expectations, but by introducing features that weren't about price and wage setting, it showed that monetary policy indeed can have quite an impact. So then John Taylor followed this up by investigating overlapping contracts, staggered contracts, so where some wages are set in January but then set for a whole year, let's say, and some wages are set in July and last for a whole year.

 

So you get these staggered wage contracts. And the way John proposed it was that when you set that new wage, you have to take into account not only the wages that have been set in the past, but also that there will be wage setting in the future. And as a result, the wages that have been set for one year will have an impact on the economy that lasts a lot longer than that year.

 

There will be persistent effects. Rereading these papers, and I think Bob did a great job at showing these models. They really resonate with me in terms of what we now see in terms of the new Keynesian economics models. I mean. You change the equations a little bit and there they are again.

 

Except that the new Keynesian models don't have the standard wage contracts in them anymore. And I think maybe you should revisit this. One thing is, how would you want to set wages? Well, you want to set wages thinking that your wage shouldn't be too far away from the other wages, otherwise everybody will demand your type of labor.

 

Nobody will demand your type of labor. Now, expressing that idea cleanly requires a model with weight, heterogeneity and so forth. And I think the language at the time wasn't quite there, but for the PhD students out there, I think that now is the time to revisit these ideas and see how they can make a difference.

 

That then culminated in the paper that Bob talked about, the second Bob, not the first Bob in Echometrica, where he took a model of this type and then actually estimated it. And that, I mean, I agree with Bob King, that was really remarkable achievement. Ultimately, then also resulting in this book by John Taylor, we took this even a step further and had seven countries and developed a macroeconomic model to be used widely for policy analysis.

 

A macroeconomic model that took rational expectations seriously. So it really combined the best of both worlds from those that like Keynesianism and those that like rational expectations. I mean, I found a poor middle ground. Okay, so it's clear why this work is important. Is it lasting? Yes, it is.

 

So here's an example that I took from recent work by Alvarez and Lippi. So Fernando Alvarez and Lippi. This is just one example of many that one could pick. So Fernando Alvarez and Lippi have set themselves the task of comparing various price setting schemes. So the one that's most popular these days is called Calvo price setting.

 

But there are many other proposals out there, and standard contracts is one of them. And so they said, let's compare them. Are there some unifying features that they all have? So in this econometrical piece, they looked at what happens when, when you reset prices, you can set this for number of goods n goods rather than just one.

 

And they showed and argued essentially that as you reach N equals infinity, you get back to the staggered contracts that Taylor proposed. So these ideas are still very much alive and around, and I think we should revisit them even more forcefully. So with that, it's clear that we are really, truly standing on the shoulder of a giant and where we are in this profession.

 

But I've done even better. I decided over time not to just stand on the shoulder of a giant, but also stand behind the shoulder of a giant. So thank you, Ron.

>> Andrew Levin: So the great news is we have about 15 minutes for Q and A. I'm just going to take the prerogative as the chair to ask for an interaction between the two Bobs, I think.

 

And of course, Harold can jump in too. So, Bob King, you talked about how the Taylor rule paper, which is a Carty Rochester paper, was kinder and gentle. John emphasizes in that paper that it's not a rule that can be followed mechanically and blindly, that you need good judgment.

 

And if you're going to deviate from the rule, you do it carefully and you explain why. And so I think the question for the two of you is to what extent, if it was appropriate for the Fed to help fiscal policy in 2021, was that transparent, Was it systematic, Was it accountable, Was it, was it prudent, Was it consistent with optimal control?

 

Because, Bob King, you have done work on optimal monetary and fiscal policy, I think, at certain points. And I'm just curious because I think that if we think of the Taylor rule as a benchmark and not a mechanical rule, then this is a good case study to sort of talk through when should you deviate from it?

 

And anyway, Bob King or the other Bob, either of you want to elaborate on this?

>> Robert Barro: Okay, I'll just talk from here.

>> Andrew Levin: Yeah, please.

>> Robert Barro: So I was thinking about the deviation from the Taylor rule starting from 2020 as perhaps, as perhaps being a reasonable response in the context of an emergency situation.

 

But I'm sure if you talk to anybody at the Federal Reserve, some of which I've done, they wouldn't describe what they did in those terms. They wouldn't say that we purposely engineered this inflation surgeon and we had a good reason for doing it. They would say that they didn't understand initially that the inflation surge was setting in, and that was why they reacted very slowly in terms of adjusting interest rates.

 

And in particular they would say that initially they thought it was a transitory problem, not a longer lasting one. So I'm taking it as an as if proposition, looking at it as though the monetary and fiscal authorities were cooperating or that the fiscal authority was leading the way through fiscal dominance, and then figuring out what would you have done as kind of an optimal contingent response to the emergency being the vast increase of expenditures.

 

And from that we get a set of predictions and the predictions seem to work well. But that doesn't mean that literally, again, if you talk to the central bankers, that they're going to describe what they did in those terms. So in general, I don't think it's a good form of doing research to go to survey people and ask them, why did you do what you did?

 

I wouldn't do that in terms of firms setting prices, I don't think that would be a useful proposition. And here I'm taking the same approach with respect to central bankers. I don't think going and asking them, why did you do what you did in this case with respect to interest rates is going to be productive in understanding what happened.

 

 

>> Robert G King: So I'm just going to make one short point. You asked us did we think that the monetary authority should be supporting fiscal actions during that period? Is that.

>> Andrew Levin: No. I was really asking a broader question about systematic, transparent monetary policy. But please feel free to answer, however, whatever you want to add.

 

 

>> Robert G King: I mean, I have substantial concerns about the boundaries of the Federal Reserve System and when I think it undertakes a lot of actions that are fiscal in nature. Now, Robert may say these are good. I don't think always they are. And I think we need to have sharper lines.

 

And that's something that I have to tell you. I've read 25 Taylor papers in the last month, and that comes through in a number of John's papers as well about wanting to establish the boundaries of the central bank.

>> Andrew Levin: By the way, Michael.

>> Robert Barro: Can I just. Follow up one thing?

 

There's obviously a tension here because it's important that the central bank be committed to something that looks like prices stability. And then if you get to deviate from that by declaring an emergency, it obviously has potential problems. That's why this kind of contingent reaction only works if it's very limited to emergency type situations of which the most obvious example is wartime.

 

So that's why I thought that the COVID experience was analogous to that and that you might kind of get away with that deviation to get a kind of efficient form of public finance in terms of how to pay for a substantial part of the spending surge. But there is this tension which has to do with the importance of commitment of the central bank to something like price stability.

 

 

>> Andrew Levin: One of the contributions that Michael Bordo emphasized in that timeline, it went by pretty fast, so you may not have noticed it is how important it was that John Taylor and others here started this series of monetary policy conferences. I think over the years, many of us have been to many of them.

 

Those have been really important. And I think back three or four years ago, three and a half, let's say. Monica Piazzese gave the dinner talk about how the Fed was way behind the Taylor curve and how probably the Taylor rule and how it probably needed to raise rates to 5% or more at a time when rates were still close to zero.

 

And there were some people in that audience at dinner who were kind of, what 5%? But it turned out that actually getting back onto the Taylor rule was the right thing to do. So with that, I think Lee Ohanian has pre requested to get the first question. So Lee, do you wanna take that?

 

And then we'll, we can go from there. Others just we'll try and get as many as we can.

>> Lee Ohanian: Andy, thanks for taking my bribe to put in the first question. This is really more of a remark. First, thanks to Robert, Bob and Harald for some really interesting comments.

 

And Andy, thanks for moderating. One thing that really always struck me about John's work is that in macro monetary economics there's really, I mean, the way I see it, there's sort of four aspects. There's theory, there's econometrics, there's computation of equilibrium, and then there's kind of putting them all together and applied work.

 

And what's remarkable about John is that he's at the forefront of all four of those. And what really struck me by John is that his time must have been in so much demand and yet he found the time as a very committed public servant to serve our country.

 

So, John, thank you for doing that so much. But if any of the panelists like to pick up any of these other papers that weren't discussed. John, your work in theory on convergence to rational expectations, really influential and influenced some of Sargent's work in Evans and Hunkapoia. Also your work on non uniqueness and rational expectations models.

 

Your work with Ray Fairer on solving nonlinear models was like way, way ahead of his time, in my opinion. And then to top all that off, you used full information methods to estimate parameters long, long before it was popular and oftentimes when it was in, at least when I was on the faculty, Minnesota was somewhat looked down upon.

 

But I think we know how that debate advanced over time. So, John, thanks so much. And if any of the PAN analysts would like to follow up on these, I'd love to hear their thoughts.

>> Andrew Levin: So I saw Sebastian, right?

>> Sebatian Edwards: Thank you, Andy. This is a great session and thanks to John Taylor.

 

One of the things that I loved about this session is the history of thought component and the fact that Bob and Harold and also Rory Bearer went back all the way to the late 70s and how influential John Taylor was. I'll get back to that during the last session.

 

But I think that this is a great opportunity to ask Robert Barrow whether the Barrow Gordon model or how was it impacted by John Taylor's early work, the Econometrica 79 paper and the 1980 paper. I was at Chicago, I was a classmate of David Gordon, so I remember how that the Barrow Gordon model.

 

But what's the connection now that we're talking about things that happened at that time and that were very influential? That would be very interesting to know, I think. Andy, thanks.

>> Andrew Levin: Do you want to go ahead and respond? Sorry.

>> Robert Barro: Well, the most influential paper at the time for us was Kidland and Prescott, which we were thinking of.

 

And David Gordon had been working on his PhD thesis at the University of Chicago under Bob Lucas at the time. And he came to Rochester and then we talked about things and I remembered it's only two times that I worked out a paper very quickly and I worked out that paper on an airplane using the guidance I'd gotten from David beforehand in terms of what he was working on.

 

And I say the relationship to Kidland and Prescott. So that's what I remember, his influences on that. And of course, in terms of the remarks I said about the importance of commitment of the central bank, a lot of that is related to the work that I did at the time with David.

 

David, by the way, was a ballet dancer as well. I don't know whether you know that.

>> Andrew Levin: So another thing that picks up with Michael Bordo's timeline Is there was this debate about, well, are prices sticky or wages sticky? And I remember that debate all the way through graduate school.

 

And then finally, Larry Cristiano, who I see, and Marty Eichenbaum and Charlie Evans wrote a paper, and they said, well, we could actually look at both of those together and estimated a model that was built up partly from Kilden Prescott, but partly from John Taylor's staggered wage and price contract sort of ideas.

 

And it turned out, actually that the sticky wages were important in the model. And that, I think, paved the way toward a lot of the work that's been done at many central banks around the world about thinking about systematic policy and comparing policy rules. The kinds of models that Volker Wieland has in his database all trace back to that work.

 

Okay. I saw Michael Boskin had a.

>> Michael Boskin: Question for Bob Barrow. In your research that you were quoting, did you look at the share of public debt that's externally held? Because one might think it's a lot easier to default on foreigners than your own voters.

>> Robert Barro: So we were looking at the mechanism of surprise inflation as a way to wipe out real value of public debt.

 

So given that the emphasis is on domestically denominated public debt, so US Dollar debt in the context of the United States, foreign debt would be different. Foreign denominated debt, particularly important for other countries, would be different, and so would inflation index debt would also be different. You wouldn't have the same mechanism for essentially having a capital levy on the real value of the debt through supply prize inflation.

 

 

>> Michael Boskin: I wasn't interested in foreign denominated debt. I was interested in US US Debt held by foreigners, which a large fraction of our debt is held externally by foreign. By foreign central banks, by foreign pension funds. Insurance companies, etc.

>> Robert Barro: There's a paper by Jaume Ventura related to that, for example.

 

He argues that it's important that debt held by foreigners and debt held by domestic residents be pooled into a common market basically as a way for the fiscal monetary authority to commit, not to wipe out the debt that's held by the foreigners. And he argues that that's important to be able to issue debt to foreigners in the first place, that it's an important commitment device in that respect.

 

This didn't come up so much in the current research that we were doing, but there's other work related to that.

>> Andrew Levin: So I think John Cochran wanted to.

>> John Cochrane: Thank you. I want to pick up on this deviations from the Taylor role that you guys mentioned, because I think that's really important.

 

And my office was next to John's for several of my first years at Hoover, which was wonderful. But I learned you can get John grumpy. And here's one way to get John grumpy. You say, I never did this, but I saw other people do it. The Taylor rule, the FED should follow the Taylor rule as a mechanical rule.

 

And John will get very, very grumpy if you say that, because that's not the idea and that's not John's genius was to bring this as a framework for policy making, not as something mechanical. So there are supposed to be deviations. The Fed should compute the rule, look at the rule's recommendations, and then explain if we're going to do something different.

 

We explain why we're deviating from the rule. But that doesn't mean you never deviate. You brought up some examples. Two have come to mind recently, in the depths of COVID the unemployment rate was like 25%. Output was like 50% of, I don't know what. The numbers were just catastrophic fall in output.

 

But it would not have been appropriate to meet that fall in output with a huge monetary stimulus because we all understood there's a pandemic out there. Well, this is a time to say, here's what the Taylor rule says, here's why we're not doing it. Another example might be right after 9 11, the Fed saw a terrorist attack, interest rates to zero, flood with liquidity.

 

Well, of course, inflation and unemployment hadn't gone anywhere yet. Well, there's a time, here's the Taylor rule, here's why we're not doing it. But what the Taylor rule does is it wakes you up. The Fed in 2021 might have said, whoa, inflation surging. Taylor says, do Something. Why are we not doing something?

 

So it helps to wake you up, helps you to not do discretionary policy mistakes, and it anchors expectations. Every economist would love to work out a optimal policy model where, of course, the Fed should respond to 527 different variables optimally, according to my model. Well, models differ. And of course, that's very hard to communicate to people to, to make the Fed accountable for and to be the benchmark for expectations.

 

So we just choose the two most important ones. That's where we're going in the long run future, that stabilizes the expectations, and then we explain why we're doing things otherwise. So it's a framework for policy. And I just want to cheer that's lots of us come up with fancy equations, but John turned it into a systematic framework for policy that you deviate from sometimes for good reasons, and you deviate sometimes for bad reasons.

 

Don't do those.

>> Andrew Levin: So we're just about out of time. I just want to close with an analogy that builds on what Harold said earlier about the shoulders of the giant. So if you're at an airport or bus terminal or Grand Central and you're looking for someone, it really helps a lot if they're tall because you can see their head sticking out over everyone else.

 

And so in some way, that's what we would think of as a giant. The giant is someone who can look way ahead, who can see things that other people can't see yet. And that's John. The Fair Taylor algorithm that they developed decades ago was really useful for nonlinear models.

 

What's been starting to happen in macroeconomics more recently is recognition of nonlinearies like zero bound and other things where the nonlinear Phillips curve, the fair terror algorithm, we can be sure. And that was the giant being able to see over the crowd and develop things that turn out to be useful many, many years later.

 

So thank you again to John and thanks to our panelists. We'll move.

>> David Papell: Welcome to the session Taylor Principle in Macroeconomics. Pleasure to participate in the celebration for John Taylor. He's been my mentor for almost 50 years and that I'm sorry. So if you'd like to learn more about how John became my dissertation advisor, I have a talk on the television which you're welcome to watch.

 

So the topic of the session is the Taylor rule in macroeconomics. That is a Stanford story. What I'm going to do for a few minutes. Okay this thing, sorry, that is a Stanford story. I gave away the punchline. What I'm going to start with by taking a few minutes to talk about the prequel which I will call Macroeconomics in the Taylor Vol.

 

That is a Columbia story. So in the mid-1970s the dominant economic macroeconomic model was the new classical model with rational expectations and flexible prices. An important implication of this model this was talked about before is Sargent-Wallace policy and effectiveness theorem with systematic monetary policy had no real effects.

 

Economists, again was discussed, before quickly developed models with both policy effectiveness and rational expectations by incorporating either imperfect information or price and wage contracts. Problem with these initial models was that the policy effectiveness of only lasted for either the amount of time for the information to be revealed or for the contracts to expire.

 

John Taylor's staggered contract model, which was the subject of the previous session, showed that contracts as short as two periods could account for business cycles provided that the contracts were not renegotiated at the same time. And his 1979, American Economic Review Papers Proceedings article Staggered wage setting in a macro model elegantly demonstrated this by using math no more advanced than the quadratic formula.

 

This is the model that Columbia PhD students in the late 1970s called the new Keynesian model and John Cochran calls the Old Keynesian model. Problem with this approach is is that these models were either extremely complicated or impossible to solve when the number of periods was greater than 2.

 

Guillermo Calvo, in typical fashion, made the model simpler by making it more complicated by replacing a low order discrete time model with an infinite order continuous time. The key of course was the memoryless stochastic process for the timing of price adjustment, better known today as the Calvo theory.

 

Combined with the forward looking IS curve and Taylor rule, this became the New Keynesian model. John and Guillermo had different objectives. John was interested in developing models that could empirically account for US business cycles and was not really concerned with either optimality or simplicity at one point making the statement that eventually theorists will figure out how you can develop Optimal models that account for what happens in the world rather than wanting people in the world to change what they do to be in conform with their optimal models.

 

Guillermo was concerned with both optimality and simplicity, but was not concerned with realism. Together they created a model which with the addition of the Taylor rule, continues to be relevant today. We have four distinguished speakers here. Which I will in alphabetical order, the first speaker is Rich Clavering.

 

 

>> Richard Clarida: Thank you. And it's a real honor to be here for this event. And I was really pleased to be included on the the program. Let me advance the slide here. Let's see, which way do I point it? I'm pressing green. Okay, let me give my remarks and then maybe the slide will pop up.

 

Okay, so I've entitled this talk. The Taylor rule is almost everywhere in monetary economics but there is still room to increase market share. The two most consequential. Wonderful. Okay. The two most consequential papers in monetary economics written over the past 75 years are Friedman 68 and Taylor 93.

 

Friedman 68 introduced the concept of a natural rate of unemployment and with it the associated construct of a vertical long run Phillips curve. It also contains an insightful discussion of Vixel's natural rate of interest. But whereas USTAR and R star, as they're known today, provide reference points in Friedman's framework for how an economy evolves to equilibrium, they play absolutely no role in the famous K percent monetary policy rule that he advocates.

 

In Friedman's framework, U STAR and R are economic destinations, but not policy rule inputs. Of course, for this crowd, I don't need to elaborate that the history of K percent rules is that they were rarely tried. And when they were tried in the 70s and 80s, they were found to work much better in theory and practice by the early 1990s, thanks to Paul Volcker, who at times claimed to be pursuing a K percent rule, but I think the record will show did not.

 

The back of inflation had been broken and thanks to Alan Greenspan, the conditions for price stability had been achieved. The time was right for something or someone to fill that vacuum in central bank practice left by the realization that targeting monetary aggregate growth was not in reality a workable monetary policy framework.

 

Next slide please. If we can advance. Perfect. Next slide, great. That vacuum of course was filled by the other most consequential monetary economics paper written in the last 75 years, Taylor 1993, a crucial insight of discussion versus policy rules and practice. Was that whereas a central bank could pick the K and the K percent rule on its own without any reference to the underlying parameters of the real economy, such as U star or R star, a well designed interest rate rule needed to respect several requirements.

 

First, the rule should anchor the nominal policy rate at a level equal to the sum of its estimate of the neutral real rate and the inflation. And I'm sure John Cochran later will talk crucially about what it means to anchor in this world. Secondly, the central bank, and this is the crucial Taylor principle, the central bank should raise the nominal interest rate more than one for one with any increase in inflation relative to the inflation target.

 

And thirdly, central banks could, if they wanted to, lean against the wind when activity deviated from its estimate of potential. And this third requirement not only contributed to the objective of price stability, John argued, but obviously also desirable for central banks like the Fed that have a dual mandate.

 

Next slide, please. Perfect. So the title of these remarks is that the Taylor Rule is almost everywhere in monetary economics. And it really is. That's not an exaggeration. The Taylor Rule is ubiquitous in both Woodford's monetary and Cochrane's fiscal theories of the price level. It provides a parsimonious and rigorous empirical account of how good monetary policy is conducted by real world central banks, at least when they're not constrained by the zlb.

 

And importantly, persistent deviations from the Taylor Rule are a useful signal to signal that perhaps central banks are not pursuing an ideal policy. The Taylor Rule is actually optimal policy in a number of workhorse New Keynesian models under extreme or simplifying assumptions, but it has that property. But what's even more impressive is that it's actually remarkably robust.

 

And I know that was probably John's goal in the original paper, but it it's actually turned out to be true. Over the past 30 years, Taylor rules have been inserted in almost every imaginable monetary economy, and they almost always deliver good and sometimes nearly optimal policy outcomes across a wide range of macroeconomic specifications.

 

And Larry Christiano's work has highlighted this and including in models of monetary policy making an exchange rate in the open economy, which certainly I've worked on over time and as I'm sure Monica will highlight, Taylor rules feature prominently in empirical macro finance models of yield curve and bond pricing.

 

Finally, Taylor rule or Taylor type rules are everywhere in the briefing books that staff prepare to present economic forecasts and discuss policy options with policy makers. Next slide. One place in which policy rules are at present absent is in public communication by Many central banks, including the Fed, about the future path of the policy rate under either a baseline outlook or perhaps a scenario.

 

But research by Papel and Pradden suggests a straightforward way that policy rules could be added to the existing summary of economic projections. So this shows you how this approach would have worked in the March 2023 SEP and uses an inertial policy rule as those are favored in practice by policymakers.

 

You know, typically the funds rate doesn't go from 0 to 9% in one meeting, so it builds in some inertia. It's important to note how the policy paths are constructed in the Papel and Prodden exercise. So in this chart to the left of the vertical line at each calendar date before the March 2023 meeting, the policy rule path that you see are computed using the actual data available to the Fed at the dates indicated and for dates following the vertical line, the projections use the median SEP projections for inflation and unemployment to give a Taylor rule consistent set of projections.

 

And importantly, just to tie it to Milton, the U star and R star, which are inputs to the Taylor rule, are set equal to their median longer run values in the sep. A similar exercise could and I think perhaps over time may or should be presented in perhaps a revamped SEP that would include alternative scenarios to the SEP baseline.

 

So there's a lot of talk these days about central banks conveying communication, less through forward guidance and more through scenario presentations. And for example, the SEP could include projections conditional on slower productivity or labor force growth than assumed in the baseline. Or look at a scenario in which both the inputs to the policy rule U star and R star are higher than the committee's consensus, so there's much more I can say.

 

But I'm running out of time. So let me conclude by wishing the Taylor Rule a very happy 32nd birthday and another 75 years of influence. Thank you.

>> David Papell: Next speaker is Monica Piasesi.

>> Monika Piazzesi: Thank you very much for having me on this panel. I learned about the Taylor role from John in graduate school, for me, this was a shock because I had learned about money growth rates as an undergrad and those made little sense to me.

 

When I learned from John that this is how central banks act, I thought this made perfect sense and had a huge influence on me. And then he invited me along not long after to a conference in 1998 in Florida Islamorada. The conference happened in the Chica Lodge, which if you have been to the Chica Lodge, is a luxurious resort.

 

And I, as a grad student thought, I'm in paradise. And I thought, I'm not going to tell anybody about this conference because this is obviously where the cool people are. You have to do monetary economics, otherwise you're not going to get to the Chica Lodge. That's the first time I met Larry and many who are in the room here I met.

 

You don't remember, but I remember very well that I saw you at the Chica Lodge. So where is the Taylor Rule important? The New Keynesian model is a leading business cycle model to think about monetary policy. The Taylor Rule is one of only three equations in that model.

 

So it's obviously very important. It describes how the Fed behaves based on its dual mandate. And it makes perfect sense. When you look at it, it seems like the this is how you should be thinking about central banking. And then it's very useful because persistent deviations from the Taylor Rule signal that maybe something is not going the right way.

 

And so, for example, 20, 21, 22, that's a famous example where you had a large deviation from the Taylor Rule and probably the Fed should have done something earlier to fight inflation. I'm also going to spend time today talking about the Taylor Rule in finance. It's widely used by asset managers today, especially in fixed income markets.

 

Fixed income strategies are essentially bets on future interest rates. When you're a successful fixed income manager, you rely on risk premia. So you count on the fact that expected returns on long bonds over the short rates are positive and they vary over time. So you have to time this strategy.

 

So these are time varying deviations from the expectations hypothesis. And to think about premia, you need to think about a decomposition between expected future short rates and the rest. And the rest is then the risk premium. And so let me show you how this is useful to think about future short rates, including after being a long time at the zero lower bound, now interest rates are away from the zero lower boundaries.

 

And so it's interesting for asset managers, for example, Pimco, which is a very large, probably the largest fixed income asset manager, they publish the Cyclical Outlook in January of this year. And in their publication you can see plots of the US policy rate, so the Fed funds rate together with the Taylor rule.

 

And they do this for various countries, the euro area, Canada and the UK. For all four of these plots you sort of see that policymakers were slow to catch up with the Taylor rule and they were sort of asleep at the wheel a little bit and then caught up later.

 

And so that's useful for PIMCO because they say monetary policy today, it leaves room for additional cuts. So they compare essentially what the policy rate is that they have and compare that to what the Taylor rule would say they should be. You may be wondering what is it that Pimco is showing you?

 

And in their fine prints they explain you the equation of the Taylor Rule. Interestingly, in that publication they talk about the coefficients A and B that they're using in front of inflation and the output gap. They try out various of these coefficients and then they plot the median.

 

And so that's what they are showing you. Here is a blog post by Torsten Slok, who's gonna be at the conference tomorrow, chief economist at Apollo last year. So a year ago he had this plot of the Fed funds rate together with the Taylor rule. And then he concluded the Taylor Rule at the end of the series because the Taylor rule estimate was below the Fed funds rate.

 

He said the Taylor rule suggests the Fed should be cutting rates in March. So it's a way of forecasting. So all these examples that asset managers, how they use the Taylor rule, essentially assuming the deviations from the Taylor rule are temporary. And so that makes sense if you think of the Fed using a Taylor rule and also smoothing interest rates.

 

So the interest rate today has some dependence on the interest rate last period plus and then a term that contains the Taylor rule. If that's what the Fed is doing, then you can rewrite this as deviations from the Taylor rule and then you can see those deviations are going to die out.

 

And so, it's useful to have it as a way of thinking about where the short rate is gonna go. So this way of thinking is perfectly consistent with autocorrelated deviations that should be temporary. And if it's not temporary, again, you go back thinking of whether this might be a policy mistake or something that we should at least be talking about.

 

And then it's also useful to predict, if you look at the left hand side, you might be thinking, can I use this to predict short rates over the long horizon? And the answer is yes. And so that's exactly what asset managers do is they look at the deviations of the Fed funds rate from the Taylor rule today to forecast short rates even over long periods.

 

And then you can think about risk premier, thanks.

>> David Papell: Thank you. Our next speaker is Larry Cristiano and I'll point out that while Stanford people greatly outnumber Columbia people at, at the celebration, that Larry was a classmate of mine at Columbia. So he gets a special place here.

 

 

>> Lawrence Christiano: Okay. And the clicker is what? Not this where it is. It's not clicking. I see. Okay, all right, well, I'm very honored to be invited to talk here. Actually, it's better to say I'm grateful to be here. I have a lot to be thankful for from John.

 

However, my thankfulness and also what I learned from, from his papers are going to be presented in two different places. The thankfulness is in the video. It's interesting how at the beginning of this session the word kindness comes out a lot. Well, kindness and then another word kind of tough.

 

And I think Andy emphasized this and maybe you looked at my video. I was struck the word kindness shows up in my video lot. So I'm very grateful for these things and I have more to say about that. But right now I'm gonna talk about John's Taylor Rule and give some thoughts about it.

 

So some backgrounds. John played a major role in what was the, in the, this success of this big revolution. I don't think that that revolution is not over yet. Actually it's going beyond rational expectations now. But this was a major revolution and it's possible it couldn't have been successful without the role I'll hint at that this in a second, without John's kind of input.

 

One of the things that happened was you get an immense collaboration between academic economists and policymakers, in particular, policy makers in central banks. And it was mentioned earlier that the rational expectations revolution begins with the real business cycle model, which says central banks are, like, meaningless. And so, central bankers were not particularly keen in this or did not find us a very interesting model.

 

And but so what John did was and a few other giants, John and three more, Stan Fisher and Guillermo Calvo and then Julio Rotenberg, I think. And John was a giant at the beginning, who talked about how who introduced sticky prices and wages and talked about. How in this case, things like monetary policy do matter, which anybody who has any experience with the real world, of course, knows that.

 

And that opened up this possibility for a huge collaboration between policymakers and central banks, which continues today. I actually travel around too. My latest interest is in emerging market economy. I travel around and wherever I go, you know, the first thing I see is a Taylor rule. And so there's a baseline model everywhere and then all the other trappings of rational expectations, too.

 

But I think the reason why all of this has been accepted by these institutions is that because of people like John, this is a monumental thing. It may be that this whole enterprise wouldn't have succeeded without John and at least three other people that I just mentioned. Now, to build a model, you need a succinct characterization of everything, but including monetary policy.

 

And I think most policymakers always thought of every different episode as sort of its own special type and its own special thing, and that there was no real way to describe the whole thing as part of one picture. And I think the insight of John and the insight of the Taylor rule is that all these people who used to think that everything was a disconnected thing, see.

 

Yeah, there's a pattern here. I'm worried about output and I'm worried about. I'm worried about inflation and I can be worried about those things for a million different reasons. But that's the core of the discussions I'm having always when I'm making policy decisions. So that was the genius of this rule, which now we take for granted.

 

It's hard to see, you know, at this moment. And John argued, not only. Everybody said, yeah, yeah. They said, yeah, that's what we. That's what we actually do. When they saw the rule. But John went one more, one step further. So it's important as a positive thing, but also on normative grounds.

 

And now it's the baseline all over the place. There's a simple. Monica put up something like this. There's a simple representation of John's rule where PI is inflation and X is the output gap and there's zillions of variance and it's a hugely interesting discussion. Exactly how should you measure the inflation?

 

Is it over a year or is it PCE? Should it be expected? Inflation? We can sort of have that. But this is the basic thing, but the core thing. It's not just the Taylor rule that matters. It's the Taylor principle. John has so many things named after him.

 

Somebody asked me, is he the guy who did the Taylor series Expansion. I said, yeah, he is. Impressed. So there's the Taylor. The Taylor Principle is very, very important here. It's not just that little rule. So that rule, everybody recognizes it. But John went a step further and said, look, you should follow that rule, but you should have this.

 

The coefficient on inflation be, well, in really simple models is bigger than one. I mean, the right way to say it is. It should be big. It might be. It might be 1.5, 1.75. And I estimated it'd be something like 1.7 or something like that in the data.

 

So now I wanna talk about why is this, what's good about it in kind of simple terms. And to explain that, I want to say that in models where this is used a lot, the New Keynesian model, those models have something called a unique sort of a steady state equilibrium.

 

And that phi PI makes that, kind of selects that equilibrium that stabilizes the economy. And what I want to do was show you that why it is that fee PI relative to one in this particular case is so very, very important. Why does it stabilize the economy? And I'm gonna, I really should be wearing now an outfit like a raisin.

 

Then I think it would look more, Like John, cuz I'm gonna put up a graph here. Apologies, I think I have to apologize to every single person here. Some of you who know about this stuff, I think this is stupid. And then those of you who don't know about it, maybe or forgotten about it from your undergraduate work.

 

But here I want to just show very quickly why it is that the Taylor Principle is so very important. So I'm saying let's suppose that the monetary authority is responding to expected inflation, and the Taylor rule is that thing up there. Now, the Taylor rule involves variables that the central bank actually doesn't control.

 

So what the central bank does is it enters into the financial markets and does some kind of stuff. And that stuff is summarized by that thing called the LM curve. Now, let's suppose that the economy was kind of trying to be unstable. So all of a sudden people think there's going to be inflation.

 

They see a movie about Argentina, my God, that could happen here. So they expect higher inflation. That's the nominal interest rate on the vertical axis. Higher inflation means the real interest rate is lower. So with higher expected inflation, the intersection that curve at that old interest rate would imply a huge demand for goods.

 

The IS curve shifts up vertically by the amount of the increase in that thing. What John Taylor's suggestion is is that they should enter the financial markets. And that's all stuff going on in the background. One of the geniuses of this rule is you don't actually have to talk about financial markets.

 

There are some assumptions there, but they seem, in the light of hindsight, to be wise ones. What you have to do is shift that LM curve to the left by enough so that the interest rate rises by more than the rise in inflation. And then notice that what happens then is that the two lines, the two new lines, they intersect at a higher level, sorry, at a lower level of output, because expected inflation went up, but the interest rate went up by less.

 

So the real interest rate is low and, sorry, Jesus, the nominal interest rate goes up by more than the inflation. So the real interest rate's high demand is low, output falls, and guess what happens to inflation? It goes down. So the key thing about this monetary policy is that if people expect, just randomly, for no good reason, that there's going to be more inflation.

 

The central bank actually engineers a situation where there's less inflation. It defeats their belief in a learning model. When there's learning, what happens is that this happens. People respond to random things and change their expected inflation. And then they always see the opposite when they expect more inflation.

 

So they don't do this random stuff anymore. It stabilizes the economy, you can see that the economy is unstable because it went from Y1 to Y2. Okay, so I'm told I have to stop, so I'm gonna just go to the conclusion here. So that's the normative argument. So I'm way behind here, so I wanna argue that that graph that I put up has a huge amount of wisdom in it that if you build dynamic models with what's called learning, what ends up happening is you end up converging to the rational expectations equilibrium thus justifying the use of that idea in the first place.

 

We also show that there are many rational expectations equilibria. This policy rule selects the nice one. And anyway so this is all self referential so we stopped that and then there's the road ahead. I just want to say one thing about the road ahead is that as was shown by Monica and it's been discussed and probably, probably will be discussed a lot more, the Fed deviated from the Taylor Rule in 2021 January for about a year.

 

And this has created some real problems. There is a sense now that inflation has become de anchored which I think is what John would have suggested. And any event, it's a tribute to John actually I think that he gives an analysis of this that he wrote down 20 years before it actually happened.

 

Anyway, I'm grateful to be included in this celebration of John's work.

>> David Papell: And last but not least, we have John Cochran.

>> John Cochrane: Thanks. This is great fun. I'm reminded I owe a lot to John Taylor, but I also owe a lot to Larry Cristiano in the 1990s there was a weekly food fight on monetary policy down at the Chicago Fed with him and Larry and I miss it, Larry, him and Marty.

 

I can bound, so I wanna talk about the Taylor Rule. That's our, this is our assigned topic. This is a case of influence, not just contribution. We've talked about John's contribution but people took the Taylor rule and ran with it. And I'll show you a little bit of where we went with is as we said, it inherits in some sense the mantle of other rules but it's better and more realistic.

 

Yet beyond that contribution here's where we took it in monetary theory. So let's go back to Milton Friedman, 1968 and Friedman had a very. In page two of his speech he told us that there's a problem with interest rates. If you have an interest rate target, inflation will be unstable.

 

And I drew a little Diagram of what unstable means, and my little seal with the ball on its nose that tells you what unstable means. If you target an interest rate, inflation might pick up. Then the real interest rate is low. That pushes aggregate demand, or money printing in his case, and off it goes.

 

Said Friedman, do not target interest rates. Set the money supply. Now there's a big problem with this. Our central banks set interest rates. And it's kind of interesting that in academia even we still have models with money supply determining inflation into the 2000s. We need a theory of inflation under interest rate targets.

 

Not enough to say you need to set the money supply, because they don't. I mean, that might be nice about Mars or about past history, but we need one. So here's where John comes in. I'm sorry. Not only do they not set the money supply, there's no reserve requirements.

 

Interest rate on reserves is the same as other things. We're just awash in liquidity. So raising the rate more than one for one in this kind of model stabilizes inflation. Now this seems obvious once you look at it, but if inflation's unstable like the seal, if the seal moves his nose more than 1 for 1 following inflation, then inflation becomes stable even though the central bank is targeting interest rates.

 

So yes, we can study central banks that target interest rates and have no money supply control whatsoever. And completing a theory of inflation under interest rate targets, it took a long time, but that was the first step to let us do it. Now, New Keynesian models came along and upended how we thought the economy works.

 

And one way of saying, for those of you not in this game, New Keynesian models said we have to follow the Bob Lucas rules of economic models. None of this ad hoc equationy stuff. People are rational markets clear., specify your policy invariant things. And that's the achievement of New Keynesian economics.

 

In New Keynesian models, there's a completely different problem. Again, the doctrine was you can't have interest rate targets, you have to control the money supply, but for a different reason. And the reason wasn't instability. I'm going to complain about Larry's use of those words. The reason here was indeterminacy.

 

In the New Keynesian model, as I've graphed there, inflation is stable. If the Fed runs an interest rate target, inflation will eventually come back to where the interest rate is sort of Professor Calculus, little pendulum is my illustration. What I mean by stability there. Great. Go to sleep.

 

Aha. There's a problem. There are multiple equilibria and sunspots could drive us from One equilibrium to another and the model isn't complete. We don't know which equilibrium will come out. Said sergeant at Wallace, target the money supply. But our central banks don't target the money supply. We need a theory that applies to this planet.

 

What to do here? The Taylor principle has a completely different effect. The vision is as I show you in the green lines the central bank by following this principle, by raising more than one for one. What it does is it takes an economy that is already stable and makes it unstable.

 

Now why would anyone do anything as nutty like that, well, it makes it unstable for all but one value of inflation. And by that it's a little like Dr. Strangelove. Down the bottom here there's multiple equilibria. If you guys go to any equilibrium other than the one I like, I blow up the world with hyperinflation.

 

So you jump to the equilibrium I like. It gives you determinacy out of an indeterminate model. The equation is the simplest one right there. I equals phi PI added to I equals et PI t plus 1. Therefore et PI t plus one is phi PI t. By setting phi greater than one, you induce instability for all.

 

But phi equals zero and then we jump to the equilibrium you like. So completely different mechanism, but again that solves the outstanding problem. Now of course I'm Mr. Fiscal Theory, but the Taylor rule works here too. In fiscal theory, the government valuation equation, not budget constraint that picks one of the many stable equilibria.

 

Only one of those equilibria is the fiscal surplus sufficient to pay the interest costs on the debt. And that is what selects equilibria instead of learning rules, instead of the Fed threats and so forth. So we have a model where inflation is stable, determinate and long run neutral under an interest rate target.

 

Hooray, we've finally gotten to what MV equals PY had, except with interest rate targets. But you'd think, well, central banks are gone. No, they're not gone. Central banks are still important. And I illustrate that in the bottom, in the bottom left is a fiscal theory. What happens in 2021?

 

We dump 5 trillion bucks of money on people with no plan to pay it back and the Fed does nothing. You get a bout of inflation. What happens if the Fed raises interest rates and no change in fiscal policy? It lowers inflation in the short run, but raises it in the long run.

 

But nonetheless, you get a response that you would think would be pretty normal. Raising interest rates can lower inflation. Add those two together, it is a great and good thing for the Fed to meet the fiscal policy shock by raising the interest rate. And in fact, raising the interest rate automatically when inflation goes up does the trick.

 

What it gives you is there's got to be the inflation. We have to inflate away those bonds, as Bob Barrow showed us, but you can inflate them away slowly rather than quickly, and that minimizes the output effects. So the Taylor ruler or something very close to it is really great in the fiscal theory model too.

 

So in monetary theory, the Taylor rule is always the answer. It's just the questions that keep changing. That's usually an insult. Tariffs are always the answer. It's just the questions that keep changing, but in this case it's praise. That's what gives you the robustness of the Taylor rule.

 

For you saw how vastly different those models are. Stability, indeterminacy and optimal smoothing are three totally fundamentally different things. But the Taylor rule works great. And John's done a lot of this work too. Every individual model has an optimal policy rule that's teeny bit better than the Taylor rule, but they'll blow up in the other models.

 

The Taylor rule does great in lots of models, but there is trouble in paradise. So in the last 30 years here I showed you, I rewrote the Taylor rule in the Bob King rule, which I absolutely love. Take the shock and spread it out into an interest rate target and an inflation target and you can write the determinacy giving Taylor rule in that form.

 

And here you can see very quickly that what determinacy is doing, phi greater than one means only PI equals PI star is the right equilibrium. It's an equilibrium selection policy. But you can see the problem too. If pi = pi star, you can't see that equilibrium selection threat in the actual data where pi = pi star.

 

So that's the problem. Rich Clariter did some of the fantastic work, as well as Bob, as well as John showing how the Fed followed PHI greater than 1 in the 1980s. But that doesn't measure the phi of this model. It measures the phi of the other model, but not the phi of this model.

 

And ask yourself really, do central banks do equilibrium selection by threatening hyperinflation as we have some central bankers here? Is that your central job or is your central job as described in the old model, raise interest rates to push inflation back down in the future? Were the 1970s the failure really indeterminacy, multiple equilibrium sunspots, not policy mistakes?

 

Did Volcker really succeed by quashing multiple equilibrium volatility? And if so, why didn't we see that again when the zero bound stopped the Taylor Rule from operating for 10 years here and 30 years in Japan? Furthermore, in the New Keynesian model, I hate to break it to you, interest rates on their own raise inflation.

 

The I equals E PI continues to work even with sticky prices. Yeah, I'll be very quick. The equilibrium selection is doing all the work there. So the equations of the New Keynesian model look nothing like the way people think it works. Now maybe the equations are right and maybe people are right.

 

We don't know. And that I think is an enormous challenge right now. The equations of this model are not working the way everyone thinks they work. We either need a new model or we need to recognize our view of reality. So my last comment, I promise this is the last slide.

 

Rules rule Some good things about Taylor rule A big change in how we do stuff. We usually think of responses to shocks as measuring monetary policy, as in VARs. What Rich's regressions and John's regressions teach you is that that's just the wrong question. A shock against a stable rule is not what monetary policy is all about.

 

Monetary policy is all about getting a better rule. And despite my complaints about New Keynesian models and off equilibrium and stuff, what you guys showed is let's measure better rules being followed. And that's the key of monetary policy. Another challenge, how do we really measure the effects of better rules or not with something as mechanical as a var still hasn't been done.

 

And the last big comment, Bob Lucas and John Taylor emphasized we have people in the economy who are forward looking who react who to what you're doing. If you hit them over the head with the two by four, you might get them once but they'll duck next time around.

 

So you have to think about policy with people who are anticipating what you do. You must think in terms of rules. You can't just think in terms of actions and reactions because next time they'll duck and it won't work. And that is also a deeply important effect of John's work.

 

Thank you.

>> Richard Clarida: Thank you. John's talk reminded me of the time that I sent him a paper to ask for comments on and had a statement in the paper that the Taylor Principle was necessary and sufficient in old Keynesian models, but sufficient but not necessary in new Keynesian models.

 

And John wrote back saying, you're absolutely correct, but you should never put that in print because nobody would ever understand that. Luckily, the referees didn't notice. So we have a few minutes for questions and then I'll take them as a group and then give the four panelists a minute each to respond.

 

So,

>> David Papell: Dead ending. And just say your name for the transcript.

>> Andrew Levin: Yes. Hi, I'm Andy Levin. Really great panel. Thanks to all of you. So, question for Monica and Rich. So, Monica, you were talking about financial institutions and how they need to think about systematic policy. What do they do when the Fed says, well, we're just taking a mean by me approach?

 

Then my question for Rich is when we think back about Silicon Valley bank and the extent to which they apparently didn't realize that the Fed might need to raise rates, they were making decisions about their portfolio that turned out to have a lot of interest rate risk. You were describing about alternative scenarios I'm imagining here not only the FOMC using that, but also then bring it into the stress tests for at least some financial institutions to sort of make sure the financial institutions are aware that, we hope the rates will be staying low, but there is a scenario where we may need to raise them.

 

And maybe, Monica, if you want to comment on that too, that'd be great.

>> David Papell: Other question?

>> Harald Uhlig: Yeah, from a Tailor rule perspective, the last three years are puzzling to me. Inflation went way up and nominal interest rates didn't go up quite as much. If you do back of the envelope calculation, then maybe nominal interest rates should have gone up to 12% and that should have ultimately lowered inflation to where we are now.

 

Certainly we didn't do anything close to that. So I'm curious and maybe that drives differences out between the panelists. What do you think made inflation come back? Was it the fiscal policy that got it back? Was it the fact that inflation is stable regardless of what monetary policy does?

 

Was it some implicit threat that interest rates would rise down the road if inflation wasn't willing to come back? Or was it that inflation expectations are simply anchored and monetary policy nowadays has little to do with that?

>> David Papell: Anyone else with this here?

>> Speaker 8: Okay, thanks, actually, this is related to Harold's question.

 

So I'm confused about the optimal Taylor rule in today's environment. So the result that you should react more than one for one to inflation. It was optimal in the world you in which the rule was developed when we seem to have backward-looking expectations and a Phillips curve with a coefficient of close to 1 unlagged inflation.

 

Now we live in a world of anchored expectations. So I guess my question is how much does that change the Taylor principle or the Taylor rule? My intuition is that if expectations stay anchored, you don't necessarily have to act more than one for one for every short run movement in inflation, you know, and maybe that's why the Fed, you know, didn't think it was essential to raise interest rates by as much as inflation went up in the short run after the pandemic.

 

But I'm actually confused about what the panelists or what the inventor of the Taylor rule would, would, would say about its relevance with anchored expectations or how it should be modified.

>> David Papell: Any more

>> David Papell: Let's take one more.

>> Krishna Guha: Thank you, Krishna Guha with Overcor. As I think at least one of the panelists already mentioned, in practice, the Taylor rules that are used in monetary policy setting almost always have quite high inertial coefficients.

 

And yet this was never part of the theoretical work. I'd be interested in what the panelists feel about the merits and demerits of the practice of inertia in central banking. Thank you.

>> David Papell: Okay, let's now go down the road and we'll start with Versch.

>> Richard Clarida: All right, I drew the short straw.

 

I got the SVB question. Let me clarify. I was well back in Westport, Connecticut and Columbia during svp. So hi, I have no firsthand thinking on that in terms of water was not in the stress test. Maybe I'll take another couple of these questions and building on something Monica said and her very incredible work, one thing I've done formally for at least 20 years is in a factor model of the yield curve.

 

One of the factors is the Taylor rule residual. What is the deviation from the Taylor rule? And that actually turns out to be a very important macro factor. So I think that's the other way of the applicability is not only when central banks follow Taylor rules, but when they deviate that's also relevant to market price.

 

Maybe to Larry Ball's question, at least during my time 2018 to early 2022, you know, my thinking is it would not make sense to take anchored inflation expectations for granted. I think it helped that we had had 25 years of low inflation and that probably was quite useful in this cycle as we spent several years now going on five years above the 2% target.

 

But I think at least when I was in the job I did not take it for granted that if we did kept rates at zero for 11 years that they would stay anchored. So I think that's probably part of the thinking.

>> David Papell: Monica

>> Monika Piazzesi: I agree. I think right now we see some de anchoring of inflation expectations.

 

Inflation expectations are rising and that together with high risk premia seems to suggest to me that of course there's a lot of other things going on at the moment. But at least the experience of deviating and not reacting to high inflation has created some uncertainty among high households.

 

But also financial economists of what's going on and what the Fed is gonna do by meeting decisions, I don't think is helping with that. Having a stable rule in place and deviating as John was saying earlier, only when there's something spectacular that gives a reason for deviating I think makes much more sense because you want to have expectations in place that incorporate a rule based decision making.

 

 

>> David Papell: John,

>> John Cochrane: Larry and I

>> David Papell: doesn't matter.

>> John Cochrane: We were miserating about our how many questions can we remember at once? So Harold, what happened? I had those graphs on the slides which is my answer to what happened and it's just perfect. Where did inflation come from?

 

You have a one time fiscal blowout. That's a one time price level increase which goes away on its own in even if the Fed did nothing. The Fed raised rates a little bit and that put that monetary mechanism and brought them in, brought them back a little faster.

 

Done as far as explanation what happened. So the next one was anchoring and inertial rules, which are kind of related. Fed keeps saying this, anchored by what? What are we gonna do if they go on, we're just gonna give more speeches about anchoring. It has to be anchored by an expectation that if things get bad, the Fed will do something, and Even we'll repeat 1980, 82 if we have to.

 

That's kind of the heart of the Taylor rule now. You can't make that expectation out there and never actually move things. So I think part of what you're doing by responding to inflation now is getting people to understand we'll repeat 1980, 82, even if we never will say that in public if things get bad.

 

And similarly, that's the in the theory that we're all in the equations here, it doesn't really matter how slowly you raise it, so long as eventually you raise more than one for one. So as far as either what I call stabilizing or equilibrium selection, both of those work with very large degrees of persistence.

 

And given the noise in the data, some amount of. I hope this isn't heresy, but some amount of persistence seems like to actually make some sense.

>> David Papell: Larry

>> Lawrence Christiano: first of all, John was completely correct in one thing he said, which is that.

>> John Cochrane: Not the rest.

>> Lawrence Christiano: Not the rest, but the questions got kind of muddled in my mind now.

 

So maybe I'll just say a couple of things. One is that through the eyes, through what I think are the eyes of John Taylor, what happened in this period from January, from Biden's inauguration speech, when inflation took off, to a year later when the Fed started raising rates, that was again doing this through the eyes of John.

 

He's here, unfortunately, so he might disagree with me, but what I see is that in. From January, from Biden's speech on, there was a sequence of positive monetary shocks coming from the Fed that people kind of expected them to follow the Taylor rule and they didn't. They had a story about it.

 

We can set that aside for a second. But, so you had a sequence of positive monetary shocks and then eventually the sequence stopped. What that explains, I think, and it has nothing to do with the fiscal stuff. It just. What that explains in my mind is simply why the economy was so powerful during the Biden administration.

 

The Democrats weren't good at explaining this, but the economy was very strong. And then I think that's because of the sequence of positive monetary shocks which then went away. One other thought I wanted to just say is a little bit in response to John cuz he and I also had many food, I had wonderful recollections of all of, we had friendly food fight.

 

John is the one person you can have a bitter fight with. But it's fun. So it's an extraordinary personality, I think, I actually think it's like John Taylor a little bit that John can be tough, but there's always a friendliness in the background. Anyway,

>> David Papell: Larry,

>> Lawrence Christiano: this idea that monetary policy stabilizes in the Taylor rule by threatening to blow up things I think is incorrect.

 

This idea, in order to understand this idea, I think you, or to respond to it, you have to go back and ask why would a rational expectations equilibrium even happen? And I think the best idea for that is Bob Lucas idea, which is that it's interesting. Rational expectations.

 

If it's a place where you go where people like us make mistakes and slowly catch on. My example was designed to show how the Taylor rule works there that it works by. It gets expectations anchored by knocking them over the head a little bit when they're going in the wrong direction.

 

Eventually you stop having them go in the expectation going into the wrong direction.

>> David Papell: Larry,

>> Lawrence Christiano: now okay, this one last sentence because it has to do with stability learning equilibrium is a stable process. It's iterating the other way. You do. You iterate one direction in the forward direction which is wrong and gives you explosion.

 

Learning iterates in the other direction.

>> David Papell: I think it's time to bring this. Can we.

>> John Cochrane: Two seconds. Which is, this illustrates why macro is so fun. We have two very simple equations and we can fight for 20 for 30 years about the interpretation of these equations. And we will keep at it.

 

>> David Papell: And thank you very much. Let me just thank the members of the panel and especially John Taylor for continuing to be an inspiration to us all. Thank you.

>> John Cogan: I'm delighted to be the moderator of this panel on John's contributions to international economics and to fiscal policy. If I might just say a quick word about John. As Andy Levin said, kindness was one of John's most outstanding attributes. I've had the good fortune to work with John for nearly four decades now, and I agree with Andy's assessment.

 

In all the years, in all the days that I've worked with John, he's been very gentle to me in pointing out my errors of logic and analysis. But I would like to add another, another characteristic of John, and that is integrity. John is one of the most highest integrity scholars that I know.

 

He never shades his results, never twists his models to achieve a particular outcome. And then in policy making advice, he never blends politics with economics, he always has been a straight shooter on giving economic policy advice. Give the economics, let the policymaker decide on the politics. That's the way good economists give economic advice.

 

And that's been one of John's hallmarks. So, John, it's been Great, more than 30 years working with you and I'm looking forward to more so our panel. We've decided to break the panel into two parts. One, on international finance, we have Barry Eichengreen and Bob Hodrick. Then we'll have fiscal policy with Valerie Ramey and Mike Boskin.

 

So, Valerie, you wanna take it away.

>> Barry Eichengreen: So it's a pleasure and an honor to be here, the distance between Berkeley and Stanford is great. I'm referring to the mileage and the traffic, of course, although it can be interpreted otherwise, I suppose. John and his wife have been very gracious over the years in terms of inviting us, my wife and I, into their home when there are visitors from Europe, for example, who discovered that the distance between Berkeley and Stanford is great.

 

So we're very appreciative of that. Before the other, John rearranged the panel a little bit, I thought of myself as providing a bridge between this session and the next one. And I still think of myself as doing that just a little bit out of the intended order. So my talk on international cooperation and Sean Taylor will focus on two things.

 

Collective action clauses, which Michael Bordeaux mentioned earlier today, which are provisions in loan contracts, typically sovereign loan contracts, that enable those debts to be restructured in a more orderly, expeditious way. And EAP refers to the IMF's exceptional access policy. Under what conditions, under what circumstances are IMF members, member governments able to borrow more for longer periods?

 

Under exceptional conditions, John played an important role in promulgation of both of those new arrangements. So he tells the story of both actually in his book Global Financial warriors, focusing on the year 2002, but on surrounding events as well. So I was looking at this slide on my phone earlier and regretting the existence of Autocorrect.

 

This is a self serving remark rather than a self servicing remark, but both make the point. I like to claim that I am one of the first two authors along with Richard Portis who made the case for collective action clauses back in 1995. Why 1995? Because this was in the immediate aftermath of the Mexican financial crisis.

 

The Mexican financial crisis occasioned an unprecedentedly large IMF program and it fanned worries about moral hazard. Moral hazard for reckless policymakers in emerging markets who might have reason to anticipate that they would get larger, more generous IMF bailouts if they got into trouble, and reckless creditors as well.

 

Insofar as they were able to exit hull despite the crisis, with the help of IMF finance, they might be inclined to lend less discriminantly in the future. So the solution to this problem was a solution to this problem was to make it easier to restructure problem debts as alternative to large scale rescue packages bailouts.

 

And that in turn would make it possible to limit those exceptionally large programs because they're would exist an alternative, namely those easier restructurings under Secretary Taylor had to overcome multiple obstacles in making the case for collective action clauses and an exceptional access policy. There was the fear of higher borrowing costs which limited the willingness of emerging markets to issue bonds with these questionable provisions.

 

There was the fear that they would have to pay a novelty premium if they went first. So nobody wanted to go first and send a negative signal about their own potential credit worthiness. And there was an alternative IMF proposal and Krueger's sovereign debt restructuring mechanism. So I write here that John had to overcome the irresistible temptation for the press to set these up as competing proposals and characterized the two Stanford professors and golfing partners as rivals rather than collaborators seeking to achieve the same thing in different ways.

 

Collective action clauses became the norm in in sovereign bonds issued under State of New York law. As a result of this series of steps that spanned early 2002 through early 2003. John wrote a pithy one page memo to Treasury Secretary Paul O' Neill making the case for these provisions.

 

He delivered a speech at the IMF spring meetings announcing the Treasury's action plan for making this idea happen. Treasury led the international effort to develop model clauses that might be adopted by bond underwriters and governments going forward. At the fall 2002 IMF meetings, Treasury brought all the stakeholders, both private and public, together in the treasury cash room, but there was no agreement on immediate action.

 

Finally, in early 2003, the government of Mexico agreed to go first. And that kind of broke the logjam with many other governments then following to the point where these clauses are now indeed the norm in the United States under New York law, as they had been previously under English governing law.

 

They'd been around for a long time outside the United States. That's where the idea came from. I looked with co authors at the impact on borrowing costs because we had this comparison of bonds that issued in London that contained collective action clauses, bonds previously issued in New York that did not include them.

 

Ashok Modi and I found that for good credits, the borrowing costs actually went down. Nobody thought that a good credit would opportunistically restructure its debts, but if a bad thing happened, it would be able to do so in a more orderly way that would benefit the creditors as well as the borrower if you were a bad credit.

 

There were worries about opportunistic behavior if restructuring became easier and their borrowing costs went up. And we concluded this was a desirable outcome because it encouraged, it rewarded the good, it penalized the bad. It allowed lenders to differentiate more clearly between credits of different quality. We looked in a related paper at the next set of innovations, which were aggregation clauses, where the bondholders, holders of different bonds, different bond issues, their votes, their investments were aggregated when a qualified majority was required to agree on restructuring.

 

And we found basically the same thing, that these provisions benefited the good creditors. They penalized the good credits, they penalized the bad ones, the IMF revisited this issue more recently, and it looks like the more recent evidence now that there has been more experience in New York with these bonds is that enhanced clauses lower borrowing costs across the board.

 

Finally, a couple of words about exceptional access policy. This was another policy innovation pushed by treasury in the period when John was in Washington, he writes in his book about how he preferred rules over discretion, influenced by who, Kidlin and Prescott and John's own work on monetary policy rules.

 

So the exceptional access policy didn't turn out to be a hard and fast rule. It turned out to be more constrained discretion, if you will. And I was struck this afternoon in discussions of the Taylor rule, how neither is that a hard and fast rule, but it's a form of constrained discretion where deviations from the rule have to be elaborately justified.

 

I think you can say the same thing about the IMF's exceptional access policy. So it turns out that the Fund's independent Evaluation office looked at the exceptional access policy very recently. Last year, and they concluded that the policy did succeed in encouraging, quote, unquote, deliberate and systematic consideration of large programs.

 

But at the same time, it worried that lack of clear numerical or other benchmarks raised questions about evenhandedness, whether all cases, all countries were being treated in the same way. It pointed to repeated ad hoc changes in the framework as special cases arise, the systemic exemption, for example, for large, systemically important countries whose problems, if untreated, might destabilize the global system.

 

And it suggested that staff may have reverse engineered on occasion whether cases qualify for exceptional access in order to allow a large program to go forward, which in instances where that was staff's preference. So there still appears to be no support in the institution, according to this report, for a binding rule.

 

I think there are questions about whether the discretion is yet sufficiently constrained. So exceptional access policy is a work in progress. I was looking the other day at the size of IMF programs, IMF arrangements. There is some sign of them becoming smaller relative to gdp. And after the adoption of the policy, I don't know whether that's the direct effect of the policy or changes in the mix of countries that are on the receiving end of IMF arrangements.

 

And of course there are always also cases like this which I think are not very encouraging when one thinks about a systematic process for encouraging exceptional access to IMF resources. So my conclusion is that John's work on the international financial architecture during his days in Washington D.C. resulted in very considerable, significant achievements.

 

Thank you.

>> Robert Hodrick: I would like to begin by thanking the organizers, John Cochran and Michael Bordeaux, for inviting me to share in this honor of honoring John, it's been a pleasure to have him as a, as a colleague for the last 10 years. So today I'm going to talk about what I think of as his fundamental contributions to international economics.

 

So given the constraints on time, I'm going to focus on the book that he wrote. So it's gonna be a quick book review. So Macroeconomic Policy in a World Economy, From Econometric design to practical operation. There's going to be five steps in this. I'm going to take you through each one.

 

It's really a treatise on how to do normative economics. And by that I mean the search for systematic policies and rules that monetary and fiscal authorities in open economies, which everybody is in an open economy, can follow. And so I'm gonna start by reviewing the model. The first requirement is you have to have a state of the art model.

 

So nobody put up the overlapping contract framework yet. So I thought I'd skip through that. But there it is. Equation 1. The X is the contract wage. How is that set? It's set on the basis of expectations of what future market wages are going to be. That's the W.

 

And what future prices are going to be. That's the P. And what future income is going to be. That's the Y. And the actual wag, what's going on in markets currently is just a weighted average of past contract wages that have been set in in the past. Now, the price level in an open economy is going to depend upon the wage rate in the economy as a firm's markup over.

 

Their costs, but also on the prices of foreign goods. So we ought to bring in the exchange rate. E is the domestic currency price of foreign currency and P star is the foreign currency price. Aggregate demand is going to be met by firms who set these prices in advance or actually simultaneously as they're setting wages.

 

And that depends upon the real exchange rate, negatively on the real exchange rate, negatively on the real interest rate. Excuse me, positively on the real exchange rate. So that's the relative price of foreign goods. If that's high, we buy more domestic goods. And then on what's happening in foreign countries output as well.

 

The real interest rate has the same definition that we normally see as the nominal interest rate minus expected inflation. We get money market equilibrium condition. So real balances depend negatively on the nominal interest rate and positively on real income. And then an international capital market equilibrium condition that's uncovered interest rate parity.

 

The interest rate in the home country is equal to the interest rate in the foreign country adjusted for the depreciation that's going to take place between the domestic and foreign currencies. So that's seven equations. To close the model, we added a money supply function or an interest rate rule for each country and similar equations for each country.

 

So there's only six for the foreign country because we have an international capital market equilibrium condition that's the same for both. So how does the model work? Well, the first thing he does is he, John sets about this by saying what are some plausible parameter values? I'm going to put those in and then simulate the model and see what happens.

 

So if you, I'm gonna focus just on what happens if the domestic money supply is increased. That's going to increase real balances in both countries. So the nominal amount of money goes up in the domestic country. The prices are relatively fixed. So real balances go up in the foreign country.

 

Price level goes down because the domestic currency depreciates, the foreign currency appreciates. And so the price level falls in the foreign countries. So they get a boost in their real balances. Domestic interest rates and foreign interest rates both decrease, but the domestic interest rate has to increase more.

 

And this is to clear the money market in each country. And expected inflation starts because now prices are low. They're only temporarily low in the foreign country and they're starting to increase in the domestic country and they're going to increase over time. So both of those effects lower the real interest rate in each of the countries.

 

There is a positive output shock that takes place and over time that's gonna go away. Over time prices are going to rise in the domestic country and fall and rise a little bit in the foreign country. To get back to equilibrium, domestic currency depreciates. And one of the primary results in international economics, one of the most famous results is Rudy Doornbush's finding that the exchange rate often overshoots its long run equilibrium.

 

So why does that happen in the Dornbush model? Well, prices are fixed, output's fixed. The only thing that can adjust is the nominal interest rate. It goes up and because of expected inflation, but that means that it actually falls, excuse me, it falls to clear the money market.

 

And it's now lower than the foreign interest rate. So the domestic currency has to be expected to appreciate. And that was a result in 1976. And we're gonna see, where the first empirical evidence of that takes place later on. Okay, so given that you have this model, now you've got a model, how are you supposed to address the data?

 

Well, John says you should use full information maximum likelihood. That's what Ohanian said earlier. There's no skipping around here. If you have a simple enough model, you use full information maximum likelihood. If you don't use some other state of the art technique, Hanson's generalized method of moments for larger models.

 

Now when he actually gets around to thinking about, well I don't just want to work with this two country model, 15 equations. There's many more countries in the world and I'm going to look at interactions between all these countries. So he systematically sets apart sets and this is the heart of the book, sets about, you know, with a more complicated model, seven countries, Canada, you know, Germany, France, Italy, Japan, uk, US Price and wages are the same kind of equations in each of the countries.

 

Consumption demand is now separate equations for services, non durables and durables. There are investment equations for residential and non residential investments. Inventory investment demand depends now on the real interest rate on the long term bond. So he introduces a long term bond as well as a short term bond and permanent income.

 

So now we're getting closer to more modern models. This is work that was done Primarily in the 1980s, in the mid-1980s and then John paused to take positions in government and the book came out in 1993. So we get permanent income and long term real interest rate. There's exports and imports.

 

Now in these countries, exports depend upon the terms of trade and then a weighted average of the GDPs of the different countries and imports similarly depend on the terms of trade and domestic gdp. And now this was a really interesting feature for me. John knew that finance research had shown the significance of time varying risk premiums.

 

He didn't want to put in go all wild on I need a complete maximizing model. He put in shocks to the interest rate parity equation and shocks to the relationship between long term bonds and expected future short rates. So that was the third step was, or the second step.

 

Now the third step is to so he's estimated the model, got a state of the art theory, estimated state of the art techniques. Now we have to get the structural shocks of the model. So, this is where he relies on the work that he did with Ray Fair and.

 

Requires dynamically simulating the model into the future, conditional on the data at each point in time. This is the extended path method. And John describes this in the book as straightforward but computer intensive, and I think that is an understatement that does not do disservice to the quality of computer programming that went into that analysis.

 

So there's 136 impulse response functions because you have to get the real shocks that are in the model and I'm going to present two of them. So this is a shock to the model. That is a 3% increase in the US money supply. So what happens, so the dotted line is the price level.

 

The price level slowly increases over time, eventually asymptotes out at 3%. It takes two and a half years or no, four years, excuse me, it takes four years for prices to increase by 2.5%. So inflation is sticky during this whole time. Output responds relatively quickly. After three quarters it's 1.8% above trend.

 

The this is an incredible temptation to the monetary authority if it sees a negative shock to try and step in, I'll just put a little bit more money in the economy and all the people that are unemployed will go back to work and inflation is delayed. And this is true in each of the economies in the estimation.

 

The other interesting finding from my perspective was what happens to the exchange rate and the nominal interest rate. So the dotted line is the nominal interest rate. You increase the money supply, interest rates have to fall to clear the money market. The exchange rate of the dollar goes up above 3%.

 

This is the first evidence of Dornbush overshooting. First empirical evidence of Dornbusch overshooting that I know. I actually asked ChatGPT who was the first and they said it was Eichenbaum and Cristiano. And that was 1996. So this is way before that, I'm wrapping up. Okay, I got two more steps.

 

The fourth step is alternative policy rules with stochastic simulations. So you now have this model and you can ask questions of the model with simulations. Which is better, fixed exchange rates or flexible exchange rates? Allowing individual countries to respond to their individual economies ends up being much preferred in terms of the variances of output and inflation.

 

Is there a necessity to coordinate policy across countries? No, it turns out that the non cooperative equilibrium, the Nash equilibrium, is as just as good in the simulations as a coordinated equilibrium. And then what is the best feedback rule? Well, we see the Taylor rule there. Okay, so that's the four steps in the book.

 

I'm adding a fifth step. This is how Taylor proposes to give policy advice. Develop a state of the art theory, estimate it with state of the art econometrics, find the structural shocks and do the and their distribution which allows you to do simulations, simulate the model to find the best rule and then once you have that rule, go to the government, get involved in policy and make the world a better place.

 

And I think that's what John did. Thank you.

>> Valerie Ramey: Well, it's a great pleasure to be here to help celebrate John Taylor's accomplishments. Before I start talking about fiscal, I just wanted to say two quick things. So first of all, I was a graduate student here at Stanford when John arrived and he completed the macro sequence.

 

So. Well, unfortunately I'd already taken all my courses by the time he arrived. But he was so patient. He was a member of my dissertation committee and I was trying to do inventory investment. As you know, you need dynamics, you need rational expectations. And so I would go into his office and he helped me fill in those gaps that I had in my training.

 

So I really appreciate that. And you were again kindness and patience as well, second thing is I was at the Carnegie Rochester conference where his Taylor roll paper was given. All right, so I was an assistant professor, this was spring 1993. I was presenting a paper. Ben Bernanke was my discussant.

 

Now John Taylor's paper didn't arrive in time for when they sent out the packet. I always read all the papers when they sent us the packet, but I couldn't read that one and it was sent at the very last minute. I remember it was on the table. And then when he presented, he was just so low key and humble and said, well here's this kind of rule thing.

 

Well, he was perhaps too humble because when you look at the table of contents. So Charlie Plasser and Alan Meltzer were very nice to put a young assistant professor me at the top but they put John Taylor's paper way low so they had no idea what kind of blockbuster they had.

 

So fortunately posterity figured it out and we were all the better for it, so John Taylor's of course well known for monetary but he also has considerable contributions to fiscal policy. He has numerous books, articles, op ed pieces, congressional testimony and of course service in government. What I'm going to do is just focus on three since I have a short amount of time.

 

So which three would I focus on, I'm gonna talk a little bit more, just briefly about that wonderful book from 1993 that Bob talked about. And this is why we changed order so that you could know all the details of these equations and I could add just a little bit.

 

So it was one of the first policy analysis that rigorously incorporated rational expectations revolution and worried about the Lucas critique. The second I'll talk about is his analysis of automatic stabilizers, which of course policy rules in the fiscal domain versus discretionary fiscal policy. Some of that is in his 2000 Journal of Economic Perspectives paper and then some of his follow up papers and then the third is I'll talk about his amazing real time analysis of some of the discretionary fiscal stimuluses that have occurred during crises.

 

So first, as I said, it's one of the first large scale international macro models that incorporated rational expectations. It analyzed both fiscal and monetary policy, Bob talked about the monetary, but the fiscal policy was really impressive because he was able to run experiments not only about what happens if there is an unanticipated increase in government spending, but also if there's anticipations of a future increase in government spending.

 

He could talk about temporary increases, he could talk about permanent increases. Before the apparatus that he set up, it was very difficult to do that. And when I was writing my QJE paper that talked about news about future government spending spending, he contacted me and said, I wrote about this a little bit in 1993.

 

And so I was really able to build on what he had done. And then also the serious modeling of the policy spillover. So that's really a tremendous book that he had there. And one of the contributions was through fiscal policy. So then the second thing is his piece on reassessing discretionary fiscal policy where he talks about the benefits of automatic stabilizers versus discretionary fiscal policy.

 

And it's just a wonderful piece. I think I read it long ago and I reread it preparing for this, and it's just wonderful. It lays out the issues just very clearly about implementation lags with discretionary irreversibility and political constraints. He also argues something I hadn't thought about, which is that the conduct of monetary first of all, the conduct of monetary policy had already improved substantially, so that it could really do most of the stabilization of the economy.

 

But not only that, that having automatic stabilizers and fiscal policy was much better than the discretionary because it made the conduct of monetary easier because they were facing less uncertainty. And rereading this made such an impact. This morning I was emailing back and forth with Olivier Blanchard and we were talking about, yes, there should be more automatic stabilizers, although I'm always skeptical because since politicians always want to show that they're doing something about the crisis, they're always going to be tempted to do discretionary.

 

So if automatic stabilizers are too generous and then you put discretionary ones on top, then you end up with more debt. But still, at least in theory, it's a great idea. And then he also considers the problem of the zero lower bound. This is in 2000, where a lot of the rest of us thought that was just some Japanese thing that people had to worry about.

 

And so he was thinking about these questions way in advance of when we needed answers for the US the second is the effect, these real time analyses of the various discretionary policies. So the effects of the Bush 2001 and 2008 tax rebates, the effects of the ARRA, and then also all of the COVID stimulus packages.

 

So the Bush 2008 tax rebates came out in the summer of 2008. By November of that year, John had a Wall Street Journal article with a graph that said the rebates failed to jumpstart consumption. And he showed this very telling graph that shows disposable income shooting up and not much happening to consumption.

 

So he also showed, doing some simple aggregate regressions, that the coefficient on the rebates was basically zero. Now, his point continues to hold, even if you look at the revised data and extend it through the present, there's just not much going on with consumption. However, people ignored his analysis because subsequent household level analyses found these huge NPCs marginal propensity consumed out of the rebates and the credibility revolution had taken over.

 

And so applied micro was believed and nobody believed the macroeconomist. Well, my co authors and I have spent the last several years proving that John Taylor was right. So you can read all of those papers, some of them are forthcoming in the QJE. The multipliers on the rebates we calculate were below 0.2.

 

So he was absolutely right. Then for the ARRA with John Kovaghan, Quick and Wieland, John Taylor did this wonderful paper on New Keynesian versus Old Keynesian government spending multipliers. What's really neat is that the first draft was circulated in February 2009. So this is real time analysis right when people needed to see this.

 

So they questioned the Romer Bernstein Old Keynesian model predictions of the effects of the arra and everybody remembers those with the ARRA without graphs. They compared it to the then new Smetz-Wouter's medium-scale New Keynesian model that was related to the Cristiano Achenbaum-Evans model. And you probably cannot see that.

 

Well maybe you can. They got although on impact they got multipliers around 1, both the old Keynesian and the New Keynesian. But then it dies out pretty quickly in the New Keynesian models. Whereas the Romer and Bernstein had the multipliers actually increasing. Now this was for a permanent increase in government spending.

 

They were able to in their model go on and do something much more realistic, which is to take the actual predictive path of government spending. And there they found multipliers of around 0.5. They were even able to add the effective rule of thumb consumers. It's just amazing that they were able to get all of this done right then when the policy debate was going on.

 

Now two of my empirical papers in 2019 questioned some of the high multipliers people were finding in cross state analysis. And I suggested that they weren't too that it was something like 0.7. So again I had some work proving once again John Taylor was right. He also talked about the economic impact of the economic impact payments which was the COVID stimulus.

 

He did the same kind of straightforward analysis and didn't find evidence that it stimulated consumption. Maybe I will start working on this. I haven't yet. Stay tuned. But don't be surprised if maybe John Taylor was right about that one. So John Taylor's contributions to the analysis of fiscal.

 

He pushed the frontiers of economic science in terms of the modeling. He was prescient in the questions asked. So as I said, with the zero lower bound, how far in advance? He asked that. And then the timely analysis of the most important fiscal policies of that time period, he was there front and center doing that.

 

So thank you for all your contributions and also for being such a wonderful mentor.

>> Michael J. Boskin: As you can see, the order of our session was reversed. So originally I was gonna tee up some of the others, and now I suppose I'm batting cleanup. Not that there's anything to clean up about what was said, but let me first start with an elaboration of a theme throughout, and that's about the great person John is, as well as great economist and great friend and colleague.

 

The word kindness has come up repeatedly and toughness has come up too. John has very strong views and he, as John Kogan said, he doesn't tailor, no pun intended, tailor them to who he's talking to, as some people do, et cetera. But I would say of the hundreds of conversations and meetings I've been in with John, I've seen him have been tough many, many times, but I never once ever saw him be mean.

 

And that's really an important distinction. It speaks well of him as a human being. So that's part one. Also, there's another session on John in government, but it's mostly going to focus, I think, on John's time In the Bush 43 administration, given the framework. I obviously work with him on the council in Bush 41, so I'm going to say a few words about that.

 

But let me just say it was quite an interesting time. We had the collapse of the fall of Berlin Wall, the collapse of the Soviet Union. We had a tremendous oil shock. Saddam Hussein invaded Kuwait. Oil prices doubled at a time when we had large oil import intensity in the.

 

 

>> John Cogan: Economy and we had a recession. And at a time where the president's party had 164 congressmen and 43 senators. So it wasn't exactly like he could wake up in the morning and decide what he wanted to do, sort of as the current president tries to do. Okay, so different times.

 

It's also important to point out something that really, I think hasn't been stressed enough. People have said how well John's work has held up. But it's useful to point out how much has changed in the economy over this period and the global economy, demography, technology, et cetera. So if you go back, go back to those great late 1970s papers, there was no personal computer.

 

Deng Xiaoping hadn't opened up China yet. And China was on anybody's radar screen for many years later. The vast majority of credit extended was extended by traditional financial institutions, not by the credit market directly, which is totally reversed now where maybe three quarters of it is extended by the credit market directly and only 25, 30% by banks and other financial institutions.

 

So I can go on and on in this regard, but a lot's changed. I also want to emphasize while Valerie added fiscal to John's tremendous contributions to economic policy, and I'll say a word or two about that in a moment, John's contributions extend well beyond just monetary and fiscal policy.

 

One of the great things about the CEA is you get to work on everything. And John played a tremendous role across a wide variety of things. And I must say one thing that hasn't got much attention is, is he helped us improve our response to the previous financial crisis, which because it was superseded by the Great Recession, a financial crisis doesn't get much attention.

 

But in fact, back then we had the savings and loan crisis and the third World money center bank debt crises. It's not often remembered that virtually every money center bank, and this was before they all merged, there was a separate Manny Hanny and Hanover's Trust and all this other stuff, Chase and JP Morgan had emerged, et cetera, that they're all mark to market insolvent and why.

 

Maybe Sebastian will talk about this later on, but Miguel de Almadrid, the president of Mexico, he repudiated his debt. And you had all this Latin American debt that the banks had been involved in, egged on, encouraged by our State Department and our treasury to help Latin America. And they wound up in very, very difficult circumstances.

 

If you could trade that debt, if you could trade it, it was selling at around 15. The bid ask spreads were enormous. But it was trading at maybe 15 or 20 cents on the dollar. So that had to be worked out. And hence there was a lot of issuing with Brady bonds, et cetera.

 

But John played a role there and I think that deserves some mention. But let me just mention a few things, kind of adding to what's been said, including this issue. So let me see if this will work. Okay, so again, just brief perspective. I'm gonna say a word about the evolution of his thought on monetary policy and rules and rules more broadly across many types of policies in a moment.

 

So first, of course, great attention has appropriately been focused today on this pioneering work in macroeconomic modeling. And I'm not going to repeat that just to say that it set the stage for thinking more deeply about monetary policy and what it should be and therefore its interaction with fiscal policy.

 

It's probably worth adding for all the people who are talking about fiddling and Prescott and Lucas, that I'm old enough to remember a previous debate and discussion about fiscalist versus monetarist. The early rules versus discretion went back to Friedman and Tobin and Samuelson and Solow and a variety of people of that sort worked out in academic papers and especially in OP eds and Newsweek and so on and policy advice.

 

And it was very clear that fiscal policy especially had involved numerous temporary episodes and that seemed not to have done a whole bunch to stabilize the economy, given the frequency of recessions we had from in the 1950s 60s through the early 70s. So that's part one. I wanna re emphasize what Valerie said about John's real and John Kogan's with Volker's real time estimates of policy, that's not an easy thing to do.

 

In some sense you have to be conjectural. But it became pretty clear that while much has changed in what the government does, its desire of politicians to hand out money to people when they have an excuse or a putative need, and to call it stimulus, even if it has not much chance of stimulating.

 

A whole bunch didn't die out, unfortunately. So we have this series of episodes that Valerie mentioned and John doing real time analysis. But here we were in the summer of 1990 and the economy was growing, but slowly. And we had a lot of tensions in credit markets with the Basel accords and all this sort of stuff.

 

And then Saddam Hussein invaded Kuwait. We had the big oil shock and we didn't get data on the economy shrinking at all until I think, February of 1991. But it became very clear to us that the economy would likely go into recession and we had been in the middle of negotiating, trying to do something about the budget deficit with a very weak hand, as I described, that President Bush had.

 

Not making excuses, I think it's just a fact. And the Democrats wanted to increase spending a lot, and John and I were very dubious it would do very much and that it would, on a benefit cost basis, have benefits at all commensurate with the costs that might be incurred and the future problems.

 

And President Bush listened to that pretty carefully and I think kept his desired interventions to a minimum. We did a few things around the edges. We said, there are opportunities. If you need to do this, there's least worse ways to do it. But he stuck to doing minimal stuff.

 

Some people think that that was a political mistake. He always thought that it was Ross Perot and his breaking their new taxes pledge that did him under. But any event, let me just turn back to John on rules beyond monetary and fiscal rules, and I'll say a few words about fiscal rules in a moment.

 

We were trying to negotiate NAFTA, which we at CA kind of helped originate, along with the Secretary of State and the move to the World Trade Organization. And John got to play an important role in that, assisting our trade representative. And if there's a place where rules matter, even though they're honored frequently sub rosa, in the breach as well as the observance, it's in trade policy.

 

And we're going through that now because despite the best intentions, the Trump administration is not going to come down from the mountain with some tablets saying, here we are. These are very complex, detailed documents that have to be approved by legislatures in many countries. So he played a key role in, I think, keeping some of the worst stuff out and promoting some good aspects of that.

 

And it stemmed again from his deep conviction that setting rules. And a framework is really important. Okay, we had many discussions about monetary policy during this time. As you can imagine, there was a need to further disinflate the economy, but the economy was softening, so it put the Fed in a bit of a pickle and it put us in a bit of a pickle.

 

And we had various discussions with the Fed board and especially the chair, and then we decided to write. Bob King graciously mentioned this earlier, an economic report of the President about the desirability of monetary policy rules. As you can imagine, this was not the. For those who aren't aware of what happens when you write the economic report of the President, you send chapters around to any relevant agency that might be mentioned or involved so they can try to argue against what you're saying or improve it or give you additional data or say, do you consider this?

 

And the Fed was not exactly thrilled with this discussion and this mention, but after many different formulations, I think it's come out in the discussion now. What he really meant, which is more important than what we really meant, was we came up with the formulation that monetary policy should be rules based, by which we meant it should be anchored, framed in a rule.

 

You should deviate from it only for good reason. And frequently, as Bob Barrow mentioned, Robert Barrow, and that should be well explained, I think people have emphasized that. So John has always been very proud, as have I, that this is the first time anything like that had ever been written in an official U.S. government document.

 

So thank you for that, John. I think it had some influence and he went on to bigger and better things. But now getting back to fiscal rules, John, as Valerie mentioned carefully did is try to analyze separately or disentangle automatic stabilizers from discretionary spending. Discretionary policies with trying to disentangle that in the data isn't always the easiest thing to do.

 

Not mentioned often enough is how important it is to disaggregate the type of spending. Particularly one of the big changes in the world is that the governments around the world are no longer primarily purchases of goods and services as they were in the 60s and early 70s, but they're primarily redistributors of income with social insurance and transfer payments.

 

And the proclivity now is for even though all this discussion of infrastructure in the AARA it was like 7% of the total. And it turns out that as President Obama finally admitted, the shovels weren't exactly ready. And you don't take a disemployed carpenter and make them into a tower crane operator overnight.

 

So this was a big issue. So he did a great job of that. But in addition, and so he disentangled transfers and John and Volcker disentangled the payments to state and local governments and tried to trace through where those went, et cetera. So I think it really is a very thoughtful and deep and important contribution and sets a floor for everybody else's work to do likewise.

 

Then getting back to fiscal rules, first of all, Valerie, you're macroeconomist. Microeconomists, I know, don't always agree on everything. But let me say that one of the easiest ways to increase the automatic stabilizers would be to have much deeper progressive taxation and much larger unemployment insurance benefits. I personally think the incentive effects of that would dominate any potential modest automatic stabilization.

 

And indeed, one of the things, I guess is partly what I was doing around the same time John was doing his work, one of the things I think that has started to get incorporated in macroeconomics, including Robert Barrow and Redlich have done this in AGRI data, is to try to look at incentives and effective tax rates and how they work.

 

I'll talk about this more tomorrow in my talk late in the Monetary Policy conference. But I do believe that tax rates and effective expectations of tax rates in the future play a role both in the long run and in the effectiveness of short run stabilization policy or stimulus.

 

But in any event, there have been many attempts to try to come up with new fiscal rules, presidents had tried to have enhanced precision align item vetoes. They were stopped by the courts. Back when we thought we had very large budget deficits in the Reagan administration, cyclically adjusted, they were pretty small.

 

But in any event, they were deemed too large. And we had lots of discussions. And so Gram Rudman Hollings was adopted, which was basically a requirement to project you would gradually reduce the deficit to zero over a span of years. Okay, almost done. Okay, and then finally, so what happened was the projections were optimistic and we didn't get there and they were extended.

 

The same thing wound up happening with the Maastricht rules, where they became inconvenient but anyway, out of this came one of the things that I think perhaps was reasonable people will disagree because that was the PAYGO rule, which was basically a marginal balanced budget rule. We couldn't deal with the inherited debt and we couldn't deal with a variety of other things.

 

But I'll leave it to you to decide. Even though it was kept for quite some time, then it was off, then it was put back on again, so it's had some at least modest restraining benefit on the elected officials. But it turned out that Democrats hated it because it constrained their ability to increase spending and Republicans hated it because it constrained their ability to cut taxes.

 

So in any event, we'll see where all that winds up. But we've had commissions and we may have another commission, but we're dealing now in uncharted waters where we have very large debt, very large deficits adjusted for the cycle. And, and we have too often descended into an anodyne discussion just describing the situation as unsustainable, so I'll talk more about that tomorrow.

 

But John, you've been a great giant in the profession. You've been a wonderful friend and colleague to me and I look forward to many more years of that. Thank you.

>> John Cogan: So we got a couple of minutes for questions or comments from anybody.

>> Speaker 6: I want to say something about the intersection of kindness and students.

 

In the spring of 1990, I was in when John was a member of the council, I was in D.C and I tried calling his office to see if I could see him some sometime. And his secretary was, let's say, not particularly friendly or encouraging. And then she said well, like who are, you know, basically who are you again?

 

And I happened to mention I was an ex student and she goes John wants, always wants to go to lunch with ex students. When would you like to come? And so it's just yet another testament to his character.

>> John Cogan: John.

>> Speaker 7: Thanks a lot. I just wanna, one of your panelists said another instance of John's making the world a better place.

 

I wanted to give you a pragmatic that I know something about anyway and that in his tour as Under Secretary of Treasury for International affairs he basically worked with Iraqi officials to establish the central bank. John was back in Stanford when the Iraqi civil war was still had a few years to go.

 

But the reforms moved slowly but now are accelerating and the fundamental change in the Iraqi financial system remained intact. The last five years the bank accounts of Iraqis have gone from 2 million to approximately 20 million. The Baghdad skyline is full of cranes with construction boom with Turkey, Iraq is building an alternative trade route to Europe bypassing the Suez Canal.

 

There's been in the Iraqi Central Bank 1 devaluation since the inception. I believe in the inception of 2002 the dinar, the currency of Iraq is a little over 20 years has appreciated to the dollar by approximately 40%. This is an instance where pragmatic application of economic theory has helped lead to a meaningful increase in the lives of 42 million Iraqis with the median age of 22.

 

>> John Cogan: Well, thank you, John. Well, thank you, panelists for the time and effort you took to make these presentations. And now we have a break. Thank you all.

>> Sebastian Edwards: Okay, so this is our last session. My name is Sebastian Edwards, and I want to thank the organizers for including me in this great tribute to John Taylor. We have a great panel. I will follow the other sessions and say a few words before asking our speakers to start the conversation.

 

I always thought that public service. We're gonna talk about John in government in this session. I always thought that public service was sort of the culmination of someone's career. What we see with John Taylor is that he's been out and in to public service from very early on.

 

Senior economist at the Council, a member of the Council, several advisory boards, under Secretary of the Treasury. His has been, I think, in many ways an exemplary pattern and path for young economists. I'm not sure when I met John Taylor. I know that as soon as I met him, many of the adjectives that were used earlier, like kindness, immediately came to my mind.

 

But we served together in, I don't know if he remembers. He's in there now in the Arnold Schwarzenegger's Council for Economic Advisors. The one thing that impressed me about that situation, you have to remember that George Shultz chaired the Council and Milton was a member of the Council, and Eddie Lazear and John Taylor and Michael Boskin.

 

I mean, it was amazing for me, coming from la once every five or six weeks. And then, of course, Arnold, who was an incredible figure. And the one thing that was quite impressive to me about John at that time is that he was very modest. He already was very famous.

 

He already. The Taylor rule was around and was dominant, but John was very modest. I'm talking John when you and I were members of the Council for Schwarzenegger. And that was an amazing story. Barry Eichengren brought up the book. I think that if we want to understand John Taylor in government reading.

 

If you haven't read it or reread it, I reread parts of it in the last few days. Global Financial Warriors. It has in the first chapter, whole discussion about John spending time in the Situation Room at the White House. And I imagine that Condi, of course, was there, and she may be talking about that in her presentation.

 

But the part I like the most is when John Taylor goes on a C130 from Kuwait to Baghdad. The first time he's dressed just like he is now, he tells the story. Dark blue suit, a necktie, and black street shoes. And everyone else on the plane is, of course, wearing combat boots and camouflage dresses and so on.

 

And you go and read through the book, and it's an amazing story. And you can see John in government around the world. I originally, I come from Latin America, as some of you know. And the story I like about John and Ann Krieger was also involved in this the most is the role he had in the argentine crisis of 2001.

 

And John said, well, there's going to be contagion. And the number one contagion from Argentina is Uruguay. And these guys are more or less well behaved. We don't have to. They don't have to fall because Argentina is falling. And John played a very, very important role. And Uruguayans, every time I talk to people in Uruguay, they always remember John very fondly because of the work he did there.

 

I personally have benefited a lot from John's work teaching macroeconomics to MBA students. The Taylor Rule is a winner. They understand it, they like it, but one has to teach them a few things. One of them is what John Corcoran said earlier, which is, I think, very important.

 

It's not a mechanical rule. You cannot just feed it into a computer and have a computer run monetary policy. It gives you some elements and then the policymaker has to decide what to do. Every year I offer a prize to my students is they find a country where there hasn't been massive work on the Taylor Rule and they haven't ever found it.

 

So I am increasing the amount of money that I give away. So you look India, Taylor Rule, there's a million papers, literally. Google tells you how many entries there are. The other benefit that I've had from John's work is that I go around Latin America advising governments and when central bankers don't want to listen to what I'm saying, I drop his name and I say, my friend John Taylor.

 

And they say, you know, John Taylor, and the attitude absolutely completely changes. It's different to say that you know and you are a friend of John Taylor than to. There are some people that say, does he really exist? It happened to me in Guatemala of all places. Let me just mention a couple of things before asking the members of the panel, which as following the earlier sessions, I'm not going to introduce because everyone knows everyone here.

 

John played a very important role in convincing emerging markets that capital controls were a bad idea. And I think that that was a battle that largely he won. And we're seeing now Argentina lifting capital controls. And we'll see where that goes. It's a big question mark and I am personally optimistic.

 

Another issue that has to do with John's work in government and where he convinced me is whether the exchange rate should be in the Taylor Rule. Originally I thought that it should, but we had a lot of conversations and John convinced me that if you have a proper model of inflation, the exchange rate is already there.

 

You don't have to add it as a third term. Let me just finish by saying three things or picking up on three things that were discussed in the earlier sessions that I think are important. One of them already mentioned that the Taylor Rule is not a mechanical device, that it should provide some information on the conversation that central bankers had.

 

The second one is the Taylor principle, Phi. I think that's how. John. Phi greater than one. It's almost impossible in my experience, to convince a central banker that phi should be greater than one. Someone said in the last session, I think that it's cumulative, greater than 1. That you go step by step, step by step.

 

But when you tell them, and it's happened to me in every country, Latin American, some in Africa and in Asia, you tell them you have to increase interest rates, raise interest rates by more than the increase in expected inflation. They say, no way, we ain't going to do it, so I Think that there is something there that has to do with persuasion and how you present that.

 

The final point is something that Robert Barrow brought up earlier, which is emergencies and when you put the Taylor rule or rules in general on hold while the emergency takes place. And I think that we need further discussion on those issues. I've done some work on what happened in, in 1933 with the abandonment of the gold standard and the abrogation of the gold clause.

 

That was a great emergency. But I think that we need more work there. So let me then thank John for all his work and add my voice to the celebration and then introduce the panel. And we're gonna have Condi Rice first. Thank you very much.

>> Condoleezza Rice: Well, thank you very much and thanks to all of you for being here for this wonderful celebration of John Taylor's tremendous contributions to the Academy.

 

Of course. But I want to talk a little bit about his contribution to government where I was really had a chance to serve twice with John. Now a lot of you know the story from the second time that I served with John. We were post 911 and we were trying to figure out how we were going to trace terrorist financing.

 

And it turns out you needed economists to do that. And so John was very much a part of the team that put together a resolution in the Security Council just a couple of weeks after 911 that allowed us to trace terrorist financing. John also, as Sebastian just mentioned, had the good fortune to be the person who changed out the Saddam dinar for a new currency for Iraq.

 

And I do remember sitting in the Situation Room when John described to the President and all assembled exactly what this was going to entail. And if you're in the government and somebody tells you that this entails taking a huge transport plane with literally millions of dinars on them to a place that was not so stable and changing out the currency essentially by hand.

 

I could see the kind of white sheeted look on the face of the President, the Secretary of State, the Secretary of Defense, kind of, what are we doing here? But John pulled it off. Now, those are stories that are perhaps relatively well known about his impact on terrorist financing after 911 and replacing the Saddam currency.

 

But the first time that I encountered John in government was actually in 1989. What the Saddam and 911 stories tell you is that you go into government expecting one thing and you end up doing quite another. And so in 2001 we would have gone in expecting a kind of normal set of policy problems.

 

And of course, we had 911 and we had the Iraq War but this was also true the first time that I encountered John in 1989. Now, I had known John and Mike Boskin because they were Stanford colleagues and I was the young Soviet specialist on the NSC staff for Brent Scowcroft.

 

And here was our problem. All of a sudden, all of these countries wanted to leave the Soviet bloc and become our allies and our friends. The Soviet system was collapsing before our very eyes. And the first pin that was pulled in the Soviet system was when Poland decided that it was going to move from a communist government to its first elected democratic government.

 

This was, as you can imagine, an extraordinary moment for, for those of us who had been raised on the Cold War, who understood that Poland was, in fact, where the Cold War began. But the problem was that the President had made this no new taxes pledge. And we were, shall I say, resource constrained.

 

And so when the President called his secretaries together to ask, what shall we do In August of 1989, when the new finance Minister of Poland, Balcerowicz, was coming to Washington. Washington, let's just say that the suggestions from the secretaries were underwhelming. The one that I remember most was that the Commerce Department thought that we should send a trade mission to Poland.

 

Now, this didn't seem to meet the moment of Poland moving from communism to capitalism. And so we kept getting these really bad ideas from various government officials and various secretaries. But I got an idea from somebody named Jeff Sachs, actually at Harvard, which was something called a standby loan for Poland, so that Poland could exchange the zoty and it would be backed so that the currency wouldn't collapse when the exchange took place.

 

The problem was the treasury hated this idea. And it was very clear that it wasn't gonna get done on the advice of a junior staffer in the NSC. And so I thought, maybe I'll go and visit my buddies Boskin and Taylor and see what they think. And they wrote the paper that then allowed George H.W. bush to do a standby loan for Poland in the imf.

 

The zloty was exchanged. We had behind it, backing it, a billion dollar loan that was never touched. That was the work of Mike Boskin and John Taylor through the cea. And that story says something very special about what you have to do when you come to government. You come as an academic, and so you come with deep expertise, and that's why you're valued.

 

But you also have to be practical. You simply can't tell the polls that they've just thrown off 45 years of communism and they're going to have a trade mission from the United States of America. So you do have to be practical. You also have to be creative and adaptive and John and Mike in that moment were creative and adaptive.

 

You have to be a leader. You have to be willing to take a risk because for the President's CEA to step in where the treasury dared not tread I think was something of, shall we say a career risking opportunity. And most importantly you had to be trusted. And John Taylor was in all of those examples whether taking the dinar to Iraq, creating the terrorist financing, the terrorist financing resolution in the Security Council or deciding that yes, we could do more for Poland, John was trusted by the President, by his colleagues, by foreign governments and by our allies.

 

That really I think in many ways sums up what it was like to work with John Taylor in government. He was expert, practical, creative and adaptive. But more than anything. He was someone that you could trust to come up with the right solution at the right time. John, I loved working with you in government.

 

I'm glad we'll never have to do it again.

>> Sebastian Edwards: Our next speaker is John Lipsky.

>> John Lipsky: Indeed. Well, one of the risks of coming late in a program is that you'll find that everything has been said, but not everyone has said it. But of course, it's an honor and a great personal pleasure to have been invited to participate in this wonderful event.

 

In honor of John Taylor, my former Stanford classmate, housemate, and close friend of 56 years standing, I'll begin by noting, like others, I prepared for this by rereading John's 2007 book, the Global Financial Warriors. It's a terrific summary of his services under Secretary of the treasury for international affairs during 2001-2005, which was hugely challenging.

 

When you read the introduction, you note that John notes that policymaking involves first developing policy ideas and then implementing them, and that these are very different challenges requiring different skills and different methods. I immediately thought back to our time as classmates in the graduate economics program here at Stanford.

 

The program was quite small for such a renowned department. I think at that time there were only about 35 students in each year, so everyone got to know everybody else very well. There was no doubt among us that John was going to make a mark in the profession.

 

John's grasp of theory was impressive, matched only by his interest in mastery of technique. His first thesis topic had to be abandoned when it became clear that he was being beaten to the punch by Ed Prescott's research at Carnegie Mellon. Work, by the way, that formed the basis for Prescott eventually being awarded a Nobel Prize.

 

But John alters his theme and still was one of the first of us to finish. And that work in turn formed the basis of one of John's most cited scholarly articles. If John had any early issues in his career, it seemed to me that his econometrician colleagues found his theoretical contributions to be so important that he must be viewed as a theorist.

 

Conversely, his colleagues working on macro and monetary theory found his econometric work to be so impressive that he must be viewed as an econometrician. That he also became famous for the effectiveness and popularity of his introductory economics courses suggests another quality. That is, it takes superior intelligence to be able to make complex and difficult topics clear and understandable.

 

In addition, as we've heard already today, John mentored many notable doctoral students. My point, straightforward even from his student days, John John was fascinated by basic principles, but also about how to make them applicable. That this tendency helped to give birth to the world famous and widely applied Taylor Rule for conducting monetary policy should have been no surprise.

 

Now please allow me one humble brag. Side note here. Despite John's tremendous contributions, he always remained personally modest. It was my Solomon Brothers colleagues and I who lay claim to having named John's policy rule, originally contained in an obscure scholarly paper. As Valerie Ramey showed us earlier, as we named it the Taylor Rule and as Casey Stengel once said, you can look it up in global Financial Warriors.

 

John notes that one of the lessons of effective leadership is to establish a clear set of principles or goals or objectives or rules and to stick with them as each decision is made. This was so clear in his own actions that at the ceremony marking the end of his service as the Undersecretary of the treasury, his staff presented him with a plaque listing 10 additional so called Taylor Rules.

 

Now I imagine it's known in this audience. Actually it's been mentioned by Barry Eichengreen that, well, I was Ann Krieger's successor as the first Deputy Managing Director of the International Monetary Fund, and since my term ran from September 2006 through August 2011, I didn't actually serve at the same time in Washington as John.

 

Unlike Ann, however, some of the most challenging situations I faced reflected issues that John also had faced and rules that he had helped to formulate. First, if you will, a few quick remarks about the role of the International Monetary Fund. Popular myth would have it that the IMF initially was created simply to operate a system of fixed exchange rates, and when this system collapsed in 1972, it pivoted to making loans to member countries in order to resolve economic and financial crises.

 

However, it's instructive to peruse the Fund's Constitutional Articles of Agreement in enumerating the purposes of the fundamental the Articles begin by charging the institution first with, quote, facilitating the expansion and balanced growth of international trade to promote exchange stability to assist in the establishment of a multilateral system of payments in respect of current transaction between members and in the elimination of foreign exchange restrictions and only lastly to give confidence to members by making the general resources of the Fund temporarily available to the under adequate safeguards.

 

As for the Fund's original dollar exchange system, in which currencies were pegged to the dollar and the dollar was pegged to gold, this always was a system of fixed but flexible rates. As a system contemplated possible adjustments of currencies dollar pegs. Moreover, according to an important but not widely known 2004 article by Ken Rogoff and Carmen Reinhart, this system in practice was much more flexible than is commonly recognized.

 

Similarly, the post1972 so called flexible rate system today includes 66 currencies that are classified as pegged plus another 82 classified as managed, but only 66 currencies that are freely floating. In other words, the impact from the move from fixed to flexible exchange rates in 1972 was far less definitive than is thought commonly.

 

Instead, the most radical initial change associated with the creation of the IMF was the promise by members to eliminate payments and restrictions on current transactions. At the time the Articles were agreed, virtually every member had such restrictions in their progressive elimination, exactly as contemplated by the Articles, was the key driver of the rapid growth of international trade during 1950-2007, and parenthetically, this probably was the strongest period of sustained global economic growth ever achieved.

 

However, it was another development, and one that by and large existed outside the Fund's formal purview, that represented the most pervasive change in the international financial system, forming one of John Taylor's important challenges during his time in office. That was the opening of international capital markets and the ongoing growth in trade and securities, mainly equities and bonds, as well as hedging instruments rather than traditional bank lending.

 

Remember, the Articles don't give the Fund any direct jurisdiction over capital account transactions. In any case. Such transactions hardly existed in the Fund's early days, and some of the system's architects like Keynes, didn't think they should be permitted at all. While international bank lending to sovereign borrowers only became important during the 1970s, the growth of the euro bond market began at about the same time and by now securitized capital flows, as Mike Boskin mentioned, have far eclipsed cross border bank lending.

 

Moreover, international payments crises involving bank loans were rather orderly and slow moving affairs. As a Fund staff member in the early 1980s, I can recall the resolution process involving the leading bankers of the world being summoned to a meeting at IMF headquarters, being told by the Fund's then Managing Director Jacques de Rosier, by the way, with Fed Chair Paul Volcker looking on approvingly exactly how much they were expected to contribute to the resolution of the payments crisis in Country X under terms effectively dictated by the Fund.

 

However, when the issue is a potential default on sovereign bonds, the challenge is of a different nature, both in terms of speed and complexity. Clearly a new debt resolution system was required. Hence the effective competition in the early aughts between two prospective alternative approaches to dealing with a payments crisis involving the rapidly growing stock of sovereign debt denominated in a currency other than by the issuers.

 

That Barry Eichengreen talked about was the IMF's proposed sovereign debt restructuring mechanism, an approach that would have granted unprecedented bankruptcy court like powers over sovereign borrowers to the IMF versus the much more market oriented collective action clause approach favored by both financial market participants and and the U.S. treasury.

 

John and Ann Krieger know every detail of this debate that was resolved in favor of the so called cacs. And maybe Ann will be talking about that later. Eventually, more open capital markets meant the possible emergence of unprecedented payments imbalances and eventually more sizable calls on fund resources to help to resolve crises.

 

Resolution of payments crises always involves striking a balance between finance, in other words the granting of new credits by lenders and adjustment, a euphemism for belt tightening by the borrower. Some folks, including George Shultz as well as John, worried about the risk of the IMF becoming too willing to provide finance instead of insisting on lasting adjustment in the resolution of crises.

 

Hence the effort spurred by John and the US treasury to encourage the IMF to develop what was called an exceptional access procedure. As Barry talked about earlier, under this procedure, rules were developed that in effect would limit the prospect of the IMF providing very large financing arrangements, probably viewed by many as excessive as well as exceptional to a country in debt Distress.

 

The details of the procedure that was adopted can be debated, but the goal was justifiable. However, when the global financial crisis hit, after John had returned to Stanford and I had just arrived at the fund, the Greek debt crisis exploded as it had become clear that the country had been running unsustainable fiscal deficits, the huge magnitude of which had been hidden in official statistics.

 

At the same time, Greece had managed to become a member of the Euro, the European common currency, while effectively remaining outside the single market, thus preserving and protecting domestic inefficiencies while progressively reducing the economy's competitiveness, even while being able temporarily to sell sovereign debt on exceptionally favorable terms.

 

At first, the European Commission in Greece sought to resolve the crisis without involving the imf. But the situation only became worse. Eventually, the situation neared total collapse and the fund finally was called in. The Greeks insisted that they wouldn't accept any solution that involved their being expelled from the euro.

 

The European Commission, for its part, insisted they would not accept any solution that required debt restructuring, and they were willing to augment the IMF's resources in the amount needed to make a deal. In the end, they provided two thirds of the required funding. However, it became clear that an IMF program adequate to halt the crisis while preserving these two red lines was going to fail to meet all the requirements of the existing exceptional access procedure.

 

However, Greece's membership in the European Union and its participation in the Euro differentiated from previous cases, although it was followed by crises in Ireland and Portugal. But those are stories for another day. Greece, by definition didn't have either independent monetary or exchange rate policies to utilize to adjust.

 

At the same time, the European Commission feared that the failure to agree to an IMF stabilization program could lead to a systemic crisis that could threaten European stability. In the event, a modification to the exceptional access procedure was accepted, a so called systemic exception, and the deal was approved.

 

Unfortunately, while the Fund viewed efficiently boosting systemic reforms agreed by the Greek authorities to be the heart of the program, the Greek authorities simply didn't implement them and the program failed. The next step was inevitable. The European Commission accepted the need for debt restructuring, but by then the risk of a systemic crisis had passed.

 

Sadly, it took long years for a Greek government to be willing to make the needed structural reforms that point toward a much brighter future. But happily, that's the case today. Well, there's another twist to the story that involves John. The Fund's articles of agreement mandate a review of the voting power of member countries at least every five years in the interest of ensuring that voting power reflects member countries economic weight Suffice it to say that since any realignment of voting shares and associated executive board chairs is a zero sum negotiation, it took a huge effort to reach an agreement on an interim alteration at the Seoul G20 leaders summit in November 2010 that reduced the voting share mainly of European members, while rewarding dynamic emerging and developing countries.

 

The plan was that the sole agreement was to be ratified in time for the IMF annual meetings in October 2012 and that another set of adjustments would be negotiated in a follow up round to be concluded in 2015. In the United States, such an agreement requires Congressional approval.

 

For whatever reason, the Obama administration simply did not include the required language to approve the sole deal in their 2011 budget and as Republicans took the majority in the House in the subsequent midterm elections, they it became necessary to get their support for ratification. For some time it appeared that US Approval might never be forthcoming, which would have been a tremendous blow to international cooperation.

 

The reasons for the stalemate can be discussed, but to suffice to say that the responsibility was shared widely. However, John, who as we know strongly supports the idea of rules based international system, played a critical role in negotiating the solution that was finally reached in December 2015. The fund agreed to restore the previous exceptional access procedure, dropping the systemic exception, and Congress agreed to approve the sole agreement on chairs and shares.

 

As it's known, John proved once again to be someone, perhaps the only one who was trusted on all sides to play it straight and whose judgment was respected by all. Fast forward to today. The follow up voting share adjustment that had. Been promised for 2015 has yet to occur and no one is holding their breath anticipating a quick resolution under the current circumstances.

 

Moreover, I presume that everyone here has a view about the United States current international and economic and financial policies. That wise leadership is needed goes without saying. At present, John's former position of Under Secretary of the treasury for International affairs is vacant and to date no one has been nominated to the post.

 

Let us hope that someone with John's wisdom, judgment, experience and clarity of vision, not to mention energy and determination, is found to take up the critical work that goes with this position. What we know for sure is that we were all lucky that John was on the job when we were faced with a series of unprecedented challenges.

 

And you can look it up in John's book, Global Financial Warriors. Thank you very much.

>> Sebastian Edwards: Thank you. Thank you, John. Now we have Ann Kreuter.

>> Anne Kreuger: Thank you very much. Pleased to be asked to be here and to share in celebrating John and so many contributions he's made.

 

John and I were colleagues at Stanford. He came here well before I did, but we overlapped here quite a few years. John then went to Washington and I think I followed, I think at his invitation about four months later to the imf, so that we had overlapped there until he left and I stayed on just a little while afterward.

 

We had a lot of contact during that time. And I want to take a minute and just tell you a little bit about the things the Under Secretary treasury for International affairs does because to my mind, I just don't understand how anybody can keep on top of that job because it controls so much.

 

It basically is in charge of every economic activity in the US and abroad in which the US government has an immigration interest. John's vast responsibilities included U.S. policies and economic interactions with individual countries, with international organizations, both regional and national, and almost anything else that came up with regard to other countries that had an economic dimension, which is to say almost anything in the whole world.

 

Well, thank you. Other divisions in the treasury covered domestic policy and operations, including US government debt and anti money laundering. But indeed, when the International Finance Division, which John had to face those issues, of course it was the anti money laundering international part that became most important. And I think that they worked very well together, thanks much to John in that regard.

 

But there were many other things. Coordinating economic activities with the G7, which in itself is a challenge, and the G20, which is another challenge, and groups of countries such as the Asian Development bank and I could go on and on and on, but I won't and determining U.S. policy on the dollar exchange rate and U.S. lending to countries in economic difficulty.

 

I won't say more on the exchange rate partially because others have, but partially because John was instrumental in getting, I think the first time the treasury did not involve even once during his tenure in the exchange rate market, which was quite an achievement in itself and something for which everyone in this country and everyone in the world should probably be thankful.

 

It was a major accomplishment and I would love to say five or 10 minutes on it, John, but I can't. So I'll go on and just say don't forget the exchange rate. It was very important. Lots of other things, including of course, representation and purview over the IMF and the World bank, in which case we had a fair amount of contact together.

 

I'm not going to cover them all because I would get kicked out of here by the chair, if nothing else. But I will focus on several of his important achievements but ignore some of the other major issues with which he dealt. I was going to talk a bit about the Iraq initial reconstruction in which the IMF played a part and John and I worked together to some extent.

 

But on the other hand, I'll skip it briefly except to say that Conde talked about taking the money over there. The problem was getting the money in the first place. That was a big part of it and we worked a bit on that as well as other things.

 

Obviously, anti terrorism financing policy. And I will say more on that. The Argentine crisis in which both of us were involved very much. And I was gonna say sovereign debt. I'll say something about it, but I will skip the exchange rate policy for lack of time. Lots of issues in those cases.

 

I'm going to just hit the highlights. Turning to the Iraqi situation, planning for reconstruction after a possible war in Iraq. If you stop and think about it when the war is still going on, you don't know how it's going to come out. You don't know what the situation was before the war because economic policy was so messed up the statistics are not available.

 

And yet you are going to plan what happens and how you operate as soon as the war ends. I think if anybody put that on a PhD written exam, there's a question as to what the answer would be. My guess is it would be a blank piece of paper, they wouldn't know where to begin.

 

But of course that was one of the challenges John was confronted with. And of course, it was an important one and had lots to do with it. I had a little Small part of that actually asking John's help, because 911 happened, I think about four days before I, after I had just come as first deputy managing director of the fund, and I got there, and within two days of my getting there, the managing director went off to Europe and I was acting managing director.

 

And along camera. I think you were out of the country too, at the time, John, if I'm right. But in any event, what happened was the problem was that the managing director couldn't get back from Europe because there were no planes. And I called John and so pretty soon we had the manager director on another of those cargo transports as the manager came back.

 

And I heard all about the discomforts of those transports for about a week afterward. So in any event, it was one of our initial contacts that I'd already been there about four days at the time. But in any event, the currency problems, the getting the banking going, even the problem of finding the Iraqis who you could get to do some of the jobs in the civil service, finding buildings they could operate because so many buildings were destroyed and so on was itself a great challenge.

 

Now, I'm again going to go on and give some of what I had to say here for lack of time, because of the things John did, the one that at the moment is having the most immediate lasting impact, not necessarily the longest, but the most immediate is, of course, what he did in the financing of the antiterrorism drive.

 

Until John came to the treasury, or in fact, even after he came until 911, what had happened was that when countries didn't want to go to war with other countries, but they wanted to do something, trade sanctions were very frequently what was done. We will no longer export to you such and such, or we will no longer import from you such and such.

 

And trade sanctions have a long history. They are interesting mostly because they're largely ineffective, and I mean very ineffective. They're ineffective for reasons I could go into. I could entertain you for hours with stories of how sanctions get evaded one way or another. I'll just tell you one, which is when the Sinai Peninsula went over from Israel to Egypt, what happened was that Israeli soldier one night was driving from back along the Sinai, coming toward Israel, and saw some lumps in the sand.

 

Those lumps in the sand turned out to be cars made in Israel, but the next day they would be in Egypt because of course, the country was going to change hands. So those cars were smuggled into Egypt, which had much higher car prices than Israel, and yet it never entered into the records.

 

And one of the problems is you never know who and how. Is going to find other ways of doing things like that throughout the world. And the number of stories about inventive ways of smuggling and of any sanctions, the easy ones are third countries. But at the moment we have ghost ships that are bringing Soviet or Russian oil everywhere and many other things that are not just the things within that one person's imagination.

 

They're huge, they're a big business and they're not there. So the immediate question John faced was that we have all these terrorists, what have you. they don't work with within borders and somehow or other they're getting financed and obviously they need that money or they can't do that what they wanna do.

 

So you got to try and cut off the money. How do you do that? And getting monetary sanctions going and getting involved in getting other countries involved with the US So it wasn't just moving from dollars to pounds or to euros was of course a major challenge. Many of us were not only willing, able to go along more than that, but on the other hand a little bit doubtful that we could really impose them.

 

In fact the allies in this case could effectively impose them enough. John managed to get the cooperation of a significant, I think a very large fraction of the world's money supply cooperating with us in terms of the anti sanctions move. He managed also to get organizations like the International Transfer Clearing Mechanism, SWIFT involved and so on and so forth, the result of which was that for the first time there was an effective sanctions mechanism.

 

Now the trouble with that is of course that once you've done it, you can't do it again if it's already there and there are problems that way. And people even with financial sanctions do learn and it's almost the economic equivalent of a military nuclear weapon in the sense that you can really punish a country.

 

And my question, my suggestion about that right now would be look at the Iranians who have been so badly damaged despite their oil and selling it through China to Russia and so on that they are now looking for change because they've basically been forced to their knees. And it's been the power of financial sanctions if you want only one case.

 

Not that they were perfectly effective, but they've been effective enough to bring about important changes. I'm not an enthusiast because I fear the long term consequences. But on the other hand, I do recognize that this was a major contribution and that there are times when you need to use it.

 

I have to turn to Argentina. We both faced that and it was quite a thing. Argentina was unusually difficult and had been so For a long time. It did not become difficult in 2001, and the Argentines went through a cycle repeatedly of getting themselves in such trouble that they had to go to the IMF and the us.

 

They had to get some financial help, promised reform, to do a few things, and they would cut splendid somewhat and so on, and then things would start again and pretty soon they'd be back in the soup all over again. By 2001 they'd done that many times. And by 2001, as I was coming to the fund, their presence to me was being very much in the soup interest.

 

There was actually an IMF loan underway when I got there, which did not do much and so I'll skip it over. But beyond that, the problem was in Argentina. The Argentines themselves would not face up to what they'd done. The Finance Minister, the Economy Minister for Argentina. The IMF meeting fund meetings in 2001 delayed a bit because of the 911 crisis and held in Ottawa.

 

The Finance Economy Minister went around with a sheet of paper showing, he said, and told his colleagues, the other governors of the imf, that here shows our numbers, we really can do this. The IMF was saying, we can't do it because the numbers are all wrong. And basically, finally a couple of IMS staff sat down and one night we worked out not only were the numbers wrong, but the numbers were inconsistent among themselves.

 

We invited the Economy Minister to come to Washington and said, okay, we're going to talk, but step one is going to be you are going to go through and show us consistent numbers. Step two will then be we'll talk about what it needs doing. And we gave him a small room, he's actually room of research assistant and the Economy Minister dressed as gentlemen who are in those positions in Latin America normally are, with black suit and tie and all the rest of it, was there with his shirt and his tie off, working a hand calculator, working the numbers.

 

And he disappeared at 9 o' clock that night because he discovered that we were right, his numbers were wrong, and he flew back to Argentina. And that was within about two days of when the Argentines finally said they had to do something. But what then happened, and I'm making a very long story very short, was that over the next month and a half, I think Argentina had five different presidents.

 

Nobody could even hold the office. The place had fallen apart that far fast. It was very difficult to handle. Finally, the American government decided that lending had to go ahead, I think on political grounds to keep the situation under control. But as you know, Argentina at the moment is as yet another reform program which has some aspects of a more serious one than some of the ones we saw earlier, but others were not.

 

John was regarded as more or less good guy by the Argentines and I was regarded as a bad guy. And I think we actually did a service to some extent to the US by serving the bad guy function, which got a more than could be and left them at the position where they were pleading with the US for help against that evil organization.

 

There was even a cover of the Argentine equivalent of the US Time magazine of three people in military garb, soldiers in their arms, one of whom was then, then President. One was Colin Paul, one was Lee, and one was, who was the third? The three of us, the Secretary of the Treasury, Secretary of State.

 

Yes. And so on. And we were the three soldiers who were attacking Argentina. No, no, no, Thomas, who was Bobby for AK? No, it was not the third person, it was me. I was the flood one. No, not by the horse, it was my picture on the. Okay, okay.

 

Anyway, sovereign debt. Just quickly. Sovereign debt is a problem because countries, while they can go bankrupt, you can't exactly seize their assets, you can't take them to court and have them restructured in quite the same way. And there are problems because there used to be not a problem because there were just governments that led to developing countries that changed and now there's private debt, there's official debt and so on.

 

An interesting part of it, I think it was Sebastian mentioned when Comdesu. No, when Deloisier brought in the bankers, he could bring in 13 bankers who held 90% of the outstanding emerging market debt in 1982 by maybe 10%, who held a much smaller percentage of the debt. But you could basically call in the bankers and say, we're not going to lend to them unless you do and if we don't lend, they're not going to pay you.

 

And so basically, why don't we get together and they could make this system work. It got more and more difficult as there were more and more creditors from more and more places. But eventually, with a still relatively large amount of sovereign debt and with the Paris Club which coordinated the sovereign part of it among the creditor side, it was possible to get agreements often, however, with delays.

 

I think it was 1996 when the G20 called for some kind of better mechanism first, but by the Argentine crisis it was worse. And John and I both worked on that. And as John Lipsky already said, John's collective action clauses won in the sense that that's what's happened and that has made a difference.

 

But two things. First of all, collective action clauses do not cover all debtors, unfortunately, because not all debtors are not all obligations are bonds and things like that. The second one, and the one that's important and is going to be a problem for the international system for a few years to come at least, and I hope not even that long, is, of course, the Chinese have become big lenders.

 

They've refused to join the Paris Club with other sovereign lenders, and they are refusing to reduce the face value of the. Their debt, they will, as they say, let the countries delay payment. But when they delay payment, the amount they are required or demanded to be paid by the Chinese, the interest rate is even higher than it would be if they went and load.

 

And so basically, things have been very held up. We've seen Zambia, which waited more than three poor little country, waited more than three years for a rescheduling. We've seen Sri Lanka, which was held up and it still has not, does not have it sorted out. And the Chinese at the moment, as they've emerged as an important creditor, have become another major problem in the entire sovereign debt restructuring issue.

 

So I think that while John made an enormous contribution and got that one going, I do not think that is by any sense the end of the story. Now, if I had time, I would go into the US dollar and exchange rates, but I think I'm going to get called by our chairman pretty quickly.

 

And I know there are things that we want to do after this as well. So I'm just going to say end by saying it's really hard to get your head around the depth and scope of responsibilities that the person in charge of American international financial interactions with the rest of the world has.

 

It really is an amazing job. And John, I don't know how you did it, and I congratulate you then, but I also would end with a story just because we had one, and I think you told it before, too, so I'm not telling any secrets. But John and I, of course, were at some degree of disagreement, to say the least, over how you handled the sovereign debt issue.

 

And every year, as you know, there's a White House press correspondent's dinner. And one year I was invited and I agreed to go. Everybody's invited by a journalist, and I was invited by a journalist I knew and said, come. That looked fine, got there, and who's sitting next to me at the table but John Taylor, and he's sitting next to me.

 

And the journalist that invited him was down a seat or two. And so, as it happened, John and I had a golf date the next morning. And so we began discussing what time in the arrangement and the looks on the faces of these two journalists as they were waiting for us to have an argument right in front of them was really worth the trouble of the entire event.

 

It was quite a moment because we were friends on the side. Everybody said that John doesn't hold things over and so we basically could meet socially, no problem. But we did disagree on that one. And that's another testimony to John as not only a superb economist, but also a wonderful human being.

 

Thanks, John.

>> Sebastian Edwards: Okay, so last but not least, we have Peter Fisher.

>> Peter Fisher: Thank you. Thank you, John and Mike, especially for the honor of holding up the rear and having the opportunity to echo so many themes struck by so many others today. Let me say that when I think of the meaning of John Taylor's government service, particularly at the treasury, of course, what comes first to mind is what a wonderful colleague and friend and role model John was.

 

But even more, I'm struck by John's particular corner solution to the dilemma of the serious public servant. When I arrived as John's domestic counterpart, I thought I knew what was wrong with Washington. I thought a handful of obstinate ideologues refusing to listen to others were throwing sand in the gears of government and preventing all progress.

 

I quickly learned that I was precisely mistaken. I was correct that there were only a few people in Washington who will tell you what they believe, will tell you they're going to fight like hell for what they believe. And then they do. They stick to their principles. Most just get up in the morning and stick a finger in the air to see which way the wind is blowing.

 

They are almost impossible to deal with because they follow the never ending path of least resistance. Progress depends entirely on those, like John, who will tell you what they believe, explain their principles and will stick to them, making it possible to appeal to principle, to find common ground in pursuit of a common good.

 

Most of what you do when you sit in an office of an undersecretary, the one thing that's consistent day after day after day and hour after hour is not the type of problem you face. You've all heard all the many different issues John faced. It's that you face the dilemma of the serious senior public servant.

 

It is this, how much of your limited time and discretion should you commit unflinchingly to a few important principles, both to resist bad ideas and to do the most you can to make at least your corner of the world a better place? At the risk of being branded as having a tin ear for politics, or as an obstinate ideologue, or even worse?

 

And in the alternative, how much of your time do you spend bending to the political winds of the day, deferring to others, accepting that our federal government has many competing objectives and accommodate your principles to other priorities and personalities, to avoid standing out as one of the obstinate few, but at the risk of doing less than you might to make the world a better place, even if John, you did not adopt a pure corner solution.

 

Deep down, I don't think you even recognize that as a dilemma. And in defending unflinchingly your principles, you made the world a better place. Now, many wonderful examples have been mentioned. I'm just gonna touch on my favorites. I recall with admiration John applying his best efforts to use Argentina as an opportunity to lean against providing liquidity to the insolvent and lending into arrears.

 

I also think of his vigorous support, not mentioned today, as I recall, for making grants, not loans, to the poorest nations, nudging us in this more sensible direction. In each case, John was steadfast in his support of one of my favorite principles. It's not a good idea to lend money to people who cannot pay you back.

 

It's not good for them, and it's not good for you either. In promoting the use of collective action clauses, as Barry explained against the conventional wisdom, John promoted an important corollary. Nations should not borrow money they may not be able to repay without a plan, any plan, to avoid the problems of holdouts and restructuring.

 

And for the last decade, all newly issued emerging market sovereign debt, almost all of it, has included some form of collective action clauses. So even if John had not made his many contributions to all the topics you've touched on today, his service at the treasury would have struck a blow for financial thoughtfulness.

 

And as an example of unflinching adherence to core principles, George Bernard Shaw explained that the reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man. Now, I think Shaw overstates his case slightly.

 

Being unreasonable or appearing to be unreasonable may be a necessary, but cannot be a sufficient condition to be an agent of progress being an unreasonable reaction. And creating chaos in pursuit of dubious principles are no guarantee of social or economic advance as we may now be observing. History will judge whether the unreasonable man is unreasonable in pursuit of great reason and a greater good or not.

 

We can now judge John as successful. John effectively helped to bend the course of international financial policy in more sensible directions. He helped make his corner of the world a better place and at some cost. John, I'm grateful for your example and what you accomplished. I hope you can forgive those who lack the fortitude to risk the slings and arrows that will come if they adopt your resolute solution to the dilemma of the serious public servant.

 

Thank you.

>> Sebastian Edwards: Thank you, Peter. And thank you to the whole panel. We have a few minutes according to the program for questions or comments, so don't be shy. Anyone? Okay, there are three more seconds, It's going to be like an auctioneer here. Anyone? One. Over there. Okay, over there at the very end.

 

State your name, so that for the.

>> Shirley: I'm Shirley and I'm actually one of Professor Taylor's students. So this is really inspiring to see. And I guess something that I'm curious that we've briefly touched on is what kind of qualities are necessary for an academic working government as well as the different challenges.

 

And I'm kind of curious to hear more about the challenges aspect of that and how you've either witnessed other academics or Professor Taylor in navigating those challenges and I guess, standing against the political winds, yeah.

>> Sebastian Edwards: Okay, let me see if there are other questions. We'll collect if there are others, and then we'll have the panel answer the question.

 

Qualities to become a successful, influential civil servant. Yes, remember to state your name.

>> Pamela Holly: Hi. Pamela Holly. Our family is very involved in CPR. I wanted to know with all of these fascinating stories about the government and how you know economic policy and all these kind of stories on the ground, if you have recommendations on the best books, white papers, whatever, we can learn from this way, seeing that kind of practical application.

 

 

>> Sebastian Edwards: Well, global financial warriors for one John Young. I'm going to get a cut from the new royalties. You'll get any others? Yes, over here.

>> Ruthvid: Hi.

>> Sebastian Edwards: Hold on. So, we need this for the minutes of the meeting. Yes.

>> Ruthvid: Hi.

>> Sebastian Edwards: Name again?

>> Ruthvid: My name is ruthvid, I am a sophomore here at Stanford.

 

And I was just wondering in terms of understanding why what John's contribution was in helping track down terrorist financing, at least what was explained was that he was basically talking with other countries and getting them to come together to be able to track what's going on but wouldn't that be, I guess, more of a game of diplomacy rather than financial policy?

 

So, how exactly do two intersect?

>> Sebastian Edwards: Okay, great question. Okay, one more. If we have one more. Otherwise we'll go back to the panel and I think that John is going to say a few words later. So, over there. Yes, one more.

>> Chris Meisner: Thank you. Chris Meisner, I think Ann Krueger mentioned she wanted to talk about the debt and the dollar and ran out of time.

 

And I wondered if she cared to give us the short version of those comments since we have a few extra minutes. I'm curious. Thank you.

>> Sebastian Edwards: Okay, so one interesting thing that I tell my students, and I think I'm right, is that dollar policy is a Treasury decision.

 

It's not with the Fed in many countries. It's a central bank, and I think that the dollar policies with the Treasury. So that's a very interesting question. So let's go back to the panel and let's start maybe with. Okay, Conde.

>> Condoleezza Rice: All right, I'll talk about the two of these, one is about the qualities that it takes.

 

And I actually think when you go in as an academic, the tendency of academics is to know something in depth very, very, very well. And when you're in government, actually, it's very rare that a policy dilemma will come exactly in your area of expertise. And it gets to be very hard.

 

Then when you're accustomed to knowing something in depth, remember that at the moment that you finish your dissertation, you know more about that little thing than anybody else in the world. And so you have to be able to be someone who can take your expertise, ask important questions of people who have other expertise, learn how to ask the second and third order question, and then come to some kind of solution.

 

So I think breaking out of your narrowness as an academic is hard. The second thing that's hard is, you know, as academics, we have all year to get something done. A friend of mine often says, you know, it's a quarter to May, I guess I'd better get started.

 

Well, in government, you very often have to try to solve a problem very quickly. You don't have perfect information. You can't keep searching for information. And so, you have to be somebody who's comfortable with getting to that point. So I think those are a couple of qualities. And then one that was mentioned by Peter, I think it was, you do have to have a kind of North Star.

 

I've often been asked, what do you do if something is against your values or against your principles, then you don't do it. But the truth is you're almost always trying to weigh competing values and competing principles, and that's why I think it's actually harder than it looks. It's not.

 

That's against my principles. It's, I have these competing principles. For instance, with the Economist, when we would talk about the 311 sanctions that Anne talked about, which really are kind of the nuclear weapon of financial sanctions, on the one hand, you don't want to undermine the confidence in the United States and in the dollar, and the United States is a place for investment.

 

On the other hand, what other strategy are you going to use against the Russians when they invade Ukraine, for instance? So I think it's usually competing values, not one set of values or another. And just to the interesting question about diplomacy and why the terrorist financing fell to treasury, not to State.

 

Well, State would play its role, of course, but understanding how financial flows really worked, particularly through the shadow banking system that had arisen, was really, really an economist kind of question. But of course, when it comes to the diplomacy, you have to work very closely between State and Treasury to get that done.

 

 

>> Sebastian Edwards: Thank you, Condi. John, you had a very long, successful career in the private sector, investment banking. Maybe you can tell us the difference between the skills required for that and public service. And being in government.

>> John Lipsky: Good question. I think I could talk specifically about coming to the fund.

 

 

>> Sebastian Edwards: Okay, sure.

>> John Lipsky: And let me begin by saying, taking something that Conde said about having a North Star. When you're dealing in a multilateral context, it's even harder to get definitive answers. It's always a compromise, and you've just got to be able to take the long view to keep pushing, don't get discouraged, keep at it.

 

What I did find, surprisingly, when I came from investment banking to the IMF, was investment bankers. As a senior, as a manager in investment banking, you worried about the people and developing the people and making sure you had the right people in the right place to do the right job.

 

And what I found when I came to the fund is that the senior people worried more about whether the answer was right. And so it tended to lead to everybody checking and checking and checking and checking. And I thought, no, you need to spend much more time making sure you have the right people and the right job, rather than marking their test.

 

And we actually did some, a whole bunch of things at the fund to try to make it much more that way.

>> Sebastian Edwards: Thank you, John. Ann, about any of the questions that were raised

>> Anne Kreuger: I understood also the question about the transition from her to academia, and I would respond at least partially differently from John.

 

First off, there are some people who do go into government or one of the international organizations. They learn something there, often things important that are not necessarily academic and then transition not necessarily to the very top universities. But quite a few of them do go in teaching in liberal arts colleges and places like that and become very good academics.

 

Some of them have an area in which they know enough so they publish quite satisfactorily from the viewpoint of whatever the standards of the university are, and so on. Some people do it the other way. They go into academia and after a while move over. At least it has been the case also that the American government has wanted, or many people in the government have wanted to hire academics for particular consulting purposes, which gives some exposure and gives you some and so on.

 

At least for me, that was an important learning route. I was doing a lot of work on developing countries. In fact, when I went to the fund, had you asked me, the countries in which I knew most about Argentina and Turkey and Brazil, which were three of our five most important, would all have been ones that I had been working in quite recently and had a fair background in, not because I'd worked in government, but because I'd worked in anything.

 

There are other ways, too, but I think the point Peter and Condi both made is important, and that is there has to be some flexibility in the sense of adapting to the others around you and what the regulations and the constraints really are. And I think that's important.

 

No matter where you come from, when you get into government, the politics are there. And you can't say, I'm gonna ignore it. You can say, how do I use it? This is the best you can do, and you can hope.

>> Sebastian Edwards: Thank you, Ann. Peter?

>> Peter Fisher: Yes. I'll just briefly echo on this question of how to operate in government, and I think Andy touched.

 

I just wanna echo it. And something's ringing in my ear that the late Bob Glauber taught me before I became undersecretary and it looked like we were headed into a recession and I was going to be sworn in as undersecretary. And I went and asked Bob, he was teaching at Harvard at the time, for advice about how to do my job as undersecretary for domestic finance.

 

And he said, peter, you need to know you won't have time to read anything. And it's more like performance art. People will come into your office with a problem. You have to diagnose it and suggest a course of action on the spot. You don't get the chance to go read the briefing memos after the fact.

 

And that's an extreme version, I think, of what Condi's saying is you can't wait around. You don't get a lot of time, and you better take whatever tools you have and then apply them. So that's a little piece of advice.

>> Sebastian Edwards: Thank you so much to the panel and thank you, everyone.

>> Condoleezza Rice: Well, it has really been a wonderful tribute to our friend and colleague, John. I hope, John, that you feel the tremendous respect, indeed love, that we all have for you. The job that I have is to do this in a way that we get to the reception forthrightly.

 

But I don't want to skip over what we're about to do now, and that is first and foremost to remember that John has touched so many lives. He taught Econ one here forever, and I can't tell you how many people's lives he touched in that way. But I have to close my part of this by saying something about John at the Hoover Institution, because John is the George P.

 

Schultz Senior Fellow at the Hoover Institution. And there could not be a more fitting title for John than that, because what did George Shultz represent? He represented someone who, as an economist, had a tremendous impact on the academy and his work through labor, economics, and as dean of the Chicago Business School.

 

He had an impact, of course, on the field, and he had an enormous impact in government, and he had an impact on the Hoover Institution. In fact, it's hard to think of the Hoover Institution without George Shultz, and it's equally as hard to think about what the Hoover Institution would be without the contributions of John Taylor.

 

Whether it is the Monetary conference, the Monetary Policy Conference that you will all attend tomorrow, to John's extraordinary work in creating and sustaining and nurturing the Economic Policy Working Group, the many, many, many convenings that John did for Hoover supporters at Hoover, for Stanford students who perhaps just wanted a little bit of access to, shall we say, a slightly different viewpoint at Stanford University.

 

John has been a stalwart of the Hoover Institution and remains so. So my last task, my last honor, is to thank you, John, for what you have done for the Hoover Institution as well as for Stanford, for our country and for our world. And then to hand it off to Jen to represent the family, unfortunately, Alen, as I understand it.

 

Yeah. Can the family stand up here? Yes, right, yes, right.

>> Condoleezza Rice: Because John, I know and had the great pleasure many times of being served in your home, whether in Washington or just right here on the Stanford campus, and getting to know the kids when they were a lot younger than they are now.

 

And so, Jen, can you come and speak on behalf of the family? And then, John, we'll turn it back to you at the end.

>> Jennifer Taylor Saleman: Thank you, Dr. Rice, for that introduction. It's impossible to express how sad my mom is that she can't be here today. She was really looking forward to it.

 

Good news is she's gonna be okay. She has a terrible, terrible, terrible cold and she had to make the hard decision today to not come but she's watching from home. It's amazing that we have technology these days. So she's doing the livestream and I just wanted to, I was thinking today as we were listening to all my dad's accomplishments that in my mom home that she has been a tremendous support of my dad over his years of his career, putting her career to side and and I just want to acknowledge that and thank her mom on the live stream for supporting my dad over these years.

 

So thank you for her. So I'm going to attempt to fill in for her today as she was going to give some remarks that she worked hard to prepare. So it means so much to our family to see so many people today and gather and honor my dad's career on her behalf and mine.

 

I want to thank John Cochran and Michael Bourdeau for their tireless work organizing this conference and of course Marie Christine, the assistant extraordinaire for the countless hours she's put to make all of this happen. Of course, thank you to Hoover and to everyone who's contributed to creating this.

 

Such a thoughtful and engaging program. As we look through the agenda, we were struck by how, how well each session really reflected my dad's deep love for economics and his unwavering belief in the power of public policy to improve lives. But in reviewing the program, my mom noticed one small omission, something only she could really fill in, having been on the journey with him from the very start.

 

And that's how did he actually even end up in this particular career? But you're in luck because she passed along the backstory for me to share with you all today. My dad started at Princeton, planning to major in physics. I'm not quite sure what changed his mind. Maybe his grades.

 

But he soon shifted to economics, where he truly thrived. His senior thesis won the Wolf Ballastein Memorial Prize in Economics. And he was very fortunate to have E Philip Hawdrey as his advisor. And after graduation, he ended up working for him as a research assistant. When Howdre asked about my dad's future plans and learned he was intending to go to Stanford Business School, he told him that was a big mistake.

 

He wanted him to pursue a PhD in economics instead. After some convincing, my dad changed course. And Hawdrey helped him land a spot in the economics department at Stanford. We think it may have been the spot vacated by John Lipski, who later became A very, very close family friend who had stepped away from military service in Iowa after finishing his PhD my dad went on to the job market and was hired by Columbia University as an associate professor of econometrics.

 

He and my mom got married in December of 1972 and moved to New York City. It turned out he was the only econometrician on campus that semester as the senior professor, Phoebus Dreimas wasn't actually arriving until the fall. So my dad had to teach all of the levels of econometrics all on his own.

 

And my mom remembers the long Thursdays as the all nighters where he scrambled to stay one step ahead of those advanced students. To keep him going, she would always bake him a batch of oatmeal cookies. After that intense semester, he realized he didn't want to stay into econometrics and he wanted to be a macroeconomist.

 

But the question was how to make the leap. Once again, a senior scholar stepped in. This time it was Ned Phelbs who was working on sticky wages and prices. Together with Guillermo Calvo, they developed staggered contract models using rational expectations. My dad was initially unsure if this wasn't.

 

It wasn't exactly mainstream macro at the time, but he found the work energizing and that's how he made the transition. Even as he dove into theory and modeling, my dad always had a strong desire to to apply his work through policy. He truly believes that good economic policy can make a real difference in people's lives.

 

He first went on to experience government. It was in 1976, 77, and he took leave from Columbia to be working for the Council of Economic Advisors for the Ford and Carter administration. That's where he met Alan Greenspan, who then became a longtime friend for throughout his career. But it was when my parents moved to Stanford that policy roles became more accessible.

 

Thanks to Michael Boskin, my dad became a member of the Council of Economic advisors under George H.W. bush. And later George Shultz convinced him to serve as Under Secretary of Treasury for the International affairs under George W Bush. In these roles, he was finally able to really directly influence national and international politics.

 

And that's the story of how my dad's career evolved. How just a few key words from the right person at the right time can really change everything. Go get a Ph.D. work with me. Come to Washington. And from my mom's perspective, she would say the last 52 years has been quite a ride.

 

Dad, congratulations on an extraordinary career and success and thank you for being the best Kind of teacher and. And the best father, one who leads by example. So I'm so proud of you and I love you very much.

>> John Taylor: I have to take your notes away, thank you.

 

Thank you for being here today. It's just a wonderful experience to me. I want to begin by thanking Stanford in the Hoover Institution. These places have been more than I've just worked for. They've been home in many respects. They've given me the freedom to follow ideas wherever they lead.

 

The colleagues to challenge and inspire me and the students who constantly remind me why this work matters. I can't imagine a more rewarding place to have spent my career. A heartfelt thanks to Condi Rice, thank you, Condi. Your remarks meant a great deal to me. You've been a trusted colleague and a friend, and I'm grateful for your support and for the wisdom you shared with everyone today.

 

I also wanted to thank John Cochran, he's sitting there in the first row. Michael Bordeaux, wherever he is. Michael, where are you? There's Michael, okay. And Marie Christine Slakey, where are you? Marie Christine, There you are. Okay. Putting together a conference like this is no small task. Thank you for your vision and effort in organizing this event.

 

It's humbling to see so many colleagues, friends and family gather to reflect on the work I have been privileged to do. Finally, and most importantly, thank you to my family. They're right there. Your support, patience, and encouragement have been the foundation for everything I've been able to pursue throughout my career.

 

Thank you all again for being here and making this a very meaningful day. Thank you.

>> John Cochrane: It is my great pleasure to introduce our dinner speaker, Ed Nelson. Ed is at the Federal Reserve. Among his many other accomplishments. Yes, among his many accomplishments, he is the author of the multi volume definitive biography, Intellectual Biography of Milton Friedman, which I'm plowing my way through and I heartily recommend.

 

Ed is a frequent correspondent of mine. Anytime I write a blog post or an article with anything slightly wrong in it, boom, I get an email from Ed in about 15 seconds. Including. Ed is amazingly scholarly, including citations, and frequently he will send along PDFs, so, well, Milton Friedman actually said this, and here's the article from 1963.

 

I've learned to rely on him. I wanted to use the phrase long and variable lags and find out where did that come from? Sent Ed, and boom, comes back ten seconds later along with the PDFs from something written by Milton Friedman in about 1947. He knows exactly where it is, which is the sort of thing historians and economic historians know how to do, and I don't know how to do.

 

So it is a great pleasure. The topic he's chosen is one dear to my mind, how the Taylor rule Inherited the baton, if you will, from Money Growth Rules and Milton Friedman I heard this both from. This is secondhand, but I've learned don't look into good secondhand stories too deeply because they're too good to find out they might not be true.

 

But as you know, Friedman believed in Money Growth Rules and Bob Lucas was also a longtime advocate of money supply control. And as you know, the Fed sort of tried it and concluded, no, it doesn't work. We've gotta go back to interest rates. I gather, actually, John Taylor told me this, that at one point here at Hoover Institution, Milton told John, you know, you're right, they control interest rates.

 

This is the way to do it. But I'm too old to start all over again. But you're right, and in that sense, actually personally passed the baton. Similarly, I know Bob Lucas, who I talked to a lot about these things when I was at Chicago. When asked, well, you know, they kind of control interest rates.

 

What should they do? And he said, well, yeah, you know, the Taylor rule's the right thing to do. So that baton was officially passed, at least according to my apocryphal stories. Ed would never tell a story without checking it five times in the archives. So now we'll hear something much more scholarly.

 

>> Edward Nelson: Well, thank you, John, for that very kind introduction. And I really must thank both you and Mike for inviting me here to talk to talk tonight. And it's been a great occasion and it's great to see John and I'm so honored to be here to talk about talk a little bit about John myself.

 

And one thing I should stress at the beginning is that I'm honored to be able to do research in my part of my job. But a lot of the time I'm a desk-bound Washington bureaucrat. And I want to make sure that although I'm work at the Board of Governors, these views I expressed at this talk are mine alone.

 

And shouldn't be interpreted as official positions of the Federal Reserve System or the Board of Governors of the Federal Reserve System. And my talk tonight will be discuss the revival in the analysis of monetary policy rules that took place during the 1990s. The focus is on the role that John Taylor played in this revival and I'll argue that Taylor's role, most notably through his advancing the Taylor Rule, is usefully viewed as one of building bridges.

 

And in effect, John built bridges between two traditions, the monetary policy rules tradition. On the one hand, that tradition was associated especially with Milton Friedman, obviously also of the Hoover Institution, and this tradition emphasized the benefits of policy rules, but it was also characterized by a highly negative attitude toward the short term interest rate as a policy instrument.

 

And the second tradition was an interest rate setting tradition long associated with central banks. This tradition had largely been re established at the Federal Reserve by the early 1990s and correspondingly during this period, Alan Greenspan's Federal Open Market Committee made clear that its policy instrument was the Federal funds rate.

 

In common with the rules approach that Friedman championed, this interest rate setting tradition was receptive toward focusing monetary policy on the pursuit of price stability, but it viewed approaches that were centered on policy rules as imposing rigidity and as being antithetical to practical policy making, so was hostile to rules and my discussion will consider how John merged elements of these traditions.

 

In the course of his development and his advocacy of the Taylor rule, he took a concept associated with Friedman's simple monetary policy rules and made it a core part of practical discussions. At the same time, the Taylor rule being a specification of interest rate setting that excluded the money stock and its growth rate from both the left and right hand sides of the rule formula, amounted to a dissent from Friedman's unfavorable perspective on interest rate rules.

 

The synthesis of the two traditions that the Taylor rule represented brought the analysis of policy rules closer to central banking practices and also it proved helpful in other researchers development of New Keynesian models as we heard today now, in the 1970s and 1980s, the notion of a monetary policy rule was very strongly associated with monetary growth rules and in particular with a constant monetary growth rule, thanks especially to Milton Friedman's championing of that rule.

 

In the course of this advocacy, Friedman had built up a large body of public statements criticizing the use of short term interest rates as a policy instrument. And he was known to be acerbic. And his record of acerbic remarks about interest rate policies included his 1976 observations that the Federal Reserve should quote, forget about interest rates and that quote, monetary policy is not about interest rates.

 

Monetary policy is about the rate of growth of the quantity of money. Likewise, the monetary literature, monetarist literature often seemed to assume that in executing the task of inflation control, central banks would inevitably have to follow a monetary aggregates focused approach. And in keeping with this line of thinking, Philip Kagan, a former student of Friedman and a senior colleague of John's when John was at Columbia University, had stated in 1979 Monetary policy has to rely very greatly on monetary aggregates and the monetary authorities have to have a growth path of some total quantity of quantity of financial assets that they believe will help them control aggregate expenditures.

 

I really don't believe we can get away from that as much as looking interest rates may help. We we have got to rely on the growth of financial assets. And similarly, in 1982 Kagan remarked, Monetary targeting is the only feasible method of stabilising prices whether one likes it or not.

 

And a look at Friedman's case for preferring a monetary growth rule to an interest rate rule shows, however, that his arguments against policy rate rules, although strongly held at heart, consisted of doubts about whether they could be successfully implemented in practice. And his basis for favoring constant monetary growth did not amount to a contention that interest rate rules or interest rate reaction functions were analytically untenable or.

 

Or inherently not viable. Notably, in the course of the 1982 discussion that was negative about the practical operation of interest rate setting regimes, Friedman granted that it was in principle hypothetically possible to secure monetary control through the use of an interest rate instrument. And essentially, Friedman's argument against interest rate rules boiled down to the fact that an interest rate policy designed to deliver price stability would require that the interest rate be adjusted vigorously in response to the state of the economy.

 

And in order for their policy rules to deliver price level stability, the nominal interest rate would need to be varied in a manner that both avoided real interest rate movements that would produce prolonged swings in inflation and generated real interest rate movements when these were necessary to secure price stability.

 

Friedman was doubtful of the authority's scope to judge accurately the requisite interest rate movements and to implement them properly promptly. For example, he described the Federal reserve from the mid-1960s to the late 1970s as adjusting its interest rate targets only slowly and belatedly. In light of his concern that interest rate policies would lack the vigorous needed responses to inflation, Friedman favored quantity targets, in particular a simple rule of constant growth of the money stock to be pursued using a quantity instrument such as the monetary base or total reserves.

 

Consequently, his recommended approach bypassed interest rates, as Rich said earlier today, and which he did not deny mattered for the transmission of monetary policy actions to the economy in favor of a rule that appealed to long run reduced form relationships between monetary growth and other nominal variables like nominal income growth, inflation.

 

Now enter John Taylor. The Rational Expectations revolution provided a prism through which John Taylor looked at Milton Friedman's advocacy of a constant monetary growth rule. As an undergraduate, Taylor's interest in monetary policy rules that evolved from being motivated primarily by the, quote, philosophical reasons outlined in Capitalism and freedom to being guided by the, quote, operational reasons associated with the need to complete a dynamic macroeconomic model.

 

Subsequently, as he became a developer of dynamic rational expectations models, Taylor's focus on rules intensified. This was a setting in which it was not possible to lay out numerical values of the palsy instrument and simply make these an exogenous input into the model. A law of motion for the instrument had to be specified so that the model could be solved and the implications of nominal contracts for output and price dynamics worked out.

 

Taylor therefore judged that the rational expectations revolution placed emphasis on evaluating macroeconomic policy as a rule. He later recalled, I would put it this way, in those kinds of models, you can't really think about policy without a rule. And with respect to the specific rule, he was not an inherent to the constant monetary growth rule, preferring a rule that reacted to economic developments, an activist rule.

 

Taylor's preference for strategies that targeted final objectives rather than intermediate objectives like monetary growth was also evident in remarks that John delivered in congressional testimony in June 1989 in connection with his confirmation as a member of the CEA when he said, quote, the most important thing for the Federal Reserve and for the government in general is to be thinking about is to aim to stabilize prices and keep inflation low in the United States, and that goal will lead to more growth and a healthier economic environment if met.

 

Furthermore, sharing the disaffection that the wider economics profession had with the use of monetary aggregates and other quantity variables in monetary policy, a disaffection that was evident over much of the 1980s and that hardened in the early 1990s, tailor over these years was reconsidering the appropriateness of the focus on quantity instruments and was turning instead to short term interest rates as a candidate instrument.

 

In gravitating toward the idea of interest rate policy that was designed to deliver economic stabilization, Taylor was in effect building bridges with a long standing central bank tradition that emphasised the management of interest rates in the pursuit of macroeconomic goals. In 1931, the UK's Macmillan Committee had given expression to this tradition when it remarked that bank rate policy is quite a proper instrument for regulating the pace of expansion in an enterprise at home and for putting pressure on costs.

 

Correspondingly, after the end of the early post war period's interest rate pegging policies, an article that appeared on the international practice of monetary policy had noted that variations in interest rates brought about or furthered by action on the part of the central bank of the old fashioned quote unquote classical method of exerting authoritative influence on monetary traditions.

 

Similarly, in the UK in 1957, Richard Sayers noted that the return to a movable bank rate has been in some quarters acclaimed as a return to traditional technique. Those in or closely linked to central bank Circles in the 1950s Associated monetary policy strongly not only with interest rate rules but also with flexibility.

 

They perceive this flexibility as being essential and as making rules based approaches inadmissible. In his book, Sayers referred to interest rate policy as a flexible monetary policy and concluded a chapter on the theoretical basis of central banking by noting we must have central bankers to exercise a discretionary influence upon the monetary situation while lamenting the fact that even in our own generation there were advocates of rules.

 

Like Friedman, makers of monetary policy in the United States shared the skepticism shared this skepticism about monetary policy rules and doubts expressed about policy rules by William McChesney Martin as federal Reserve chair had been reaffirmed early in the Greenspan era by Alan Greenspan himself. As of the late 1980s, however, the federal Reserve has a more ambivalent connection with central banking tradition with regard to interest rate management.

 

Two Federal Reserve Board officials had written in 1947, Determination of the level of short term interest rates has traditionally been considered an important instrument of central bank policy. Forty years on, however, reluctance to be publicly characterized as determining U.S. interest rates, as well as the legacy of the critiques by Friedman and others of policy strategies that set interest rates, had left the Federal Reserve entering the Greenspan era, managing the Federal funds rate but not being forthright in public statements about the fact of this management.

 

David Lindsay, a former Friedman student who served at the Federal Reserve Board staff in this period, gave a talk on U.S. monetary policy in November 1992, the same month in which John Taylor delivered his Taylor Rules paper. Lindsey noted that the FOMC had restored the interest rate as its policy instrument a decade earlier, observing quote, since late 1982, sustained sizable movements in the federal funds rate have been the result of discretionary Federal Reserve decisions.

 

Nevertheless, during the Paul Volcker years, formal public acknowledgement of this management of the federal funds rate had been missing. We have no interest rate policy, chairman Volcker told the Joint economic committee in January 1983. And Volcker's position was also reflected in a headline in the same year titled Volcker Denies Fed Had Any Part in US Interest Rate Rise.

 

In Volcker's final five years in office and in the early Greenspan period, Federal Reserve policymakers, in most of their external statements and in many of their internal deliberations, took the stand that the FOMC was actually targeting a quantity variable borrowed reserves. This arrangement, however, was tantamount to management of the.

 

Federal Funds rate. Reflecting this reality, the Federal Reserve became more avert about its employment of the Federal funds rate as a as its main policy instrument. Notably, in a 1990 congressional hearing, after he had referred to a recent policy quote adjustment, Alan Greenspan was asked, the adjustment you made was in lowering the federal funds rate right?

 

To which Greenspan replied, well, yes. These developments were followed in the mid-1990s by Breakthroughs in FOMC communications. When the Committee raised the federal funds rate in February 1994, a brief press release accompanied the decision. This and later steps built on the progress that the Greenspan Federal Reserve had made over the previous five years toward greater explicitness about the use of an interest rate instrument.

 

The mid-1990s changes to FOMC communication were acknowledgement of the fact and then widely recognized that the Committee managed short term interest rates when serving on the CEA. John Taylor's attention to this matter came out clearly in the 1990 Economic Report of the President that we've already heard about.

 

And after returning to academia, Taylor was an invited contributor to a Federal Reserve Conference on operating procedures held at the St. Louis Fed. Taylor observed in his conference summary, almost every paper assumed that the interest rate, rather than reserves, was the immediate target variable for monetary policy. This reflects recent experience in the United States and many other countries.

 

One facet of Taylor's immersion in the global monetary policy scene was Taylor's continued activity during the early 1990s in the development of large macroeconomic econometric models, and this work, together with his ongoing interactions with central banks worldwide, led to his involvement in a multi pronged project spread across various sets of researchers that led to the conference volume of Bryant, Hooper, and Mann.

 

And soon after this project's completion, Taylor was among those presenting work associated with this project at the Carnegie Roches Conference in Pittsburgh in November 1992. The rule Taylor analyzed in that study, which was also released as a working paper in the same month, was simulated by the prior project's results on the cross model comparison of alternative policy rules.

 

These results suggested that the particular rule performed satisfactorily across models, and in outlining this Taylor rule in his Carnegie Rochester paper, he highlighted a further property that had characterized well the first five years of Alan Greenspan's tenure as head of the Federal Reserve. Several years later, after the Taylor rule had become part of the monetary policy idiom, Milton Friedman remarked to Taylor, I think it's almost impossible to predict what will be influential.

 

You know that from your own work. You never dreamed when you presented the Taylor rule that it was going to become worldwide Conventional Wisdom As a description of the first five years of Greenspan's tenure, the Taylor rule was notable not only because of its match with interest rate values of that period, interest rate values of that period, but also because of its favorable verdict on US Monetary policy.

 

It cast new light on a verdict that had been given by Friedman and others that US monetary policy in the early 1990s had been too tight. Taylor's evaluation contrasted with Friedman's judgment. Friedman had warned that continuation of M2 growth at current levels would imply actual deflation, but Taylor found that the Greenspan regime generated interest rate outcomes in the vicinity of a prescription of a rule that had been found to perform creditably across a variety of large econometric models.

 

Taylor's finding therefore suggested that monetary policy settings in the early 1990s had been broadly appropriate. It's worth considering that the right hand side terms in the Taylor rule and how the rules response coefficients related to Friedman's position. To start with the inflation response, the interest rate rules explored in the 1980s literature had largely limited themselves to the level of the money stock or the price level as the right hand side nominal variable.

 

In view of the emphasis given to inflation, however, rather than the absolute level of prices in modern stabilization policy, an inflation term in the reaction function was also a logical candidate and had featured in Eric Leeper's theoretical analysis. Leaper paved the way for the later literature by focusing on the economic implications of responses to inflation that were less than one for one and contrasting the economic outcomes with those resulting from greater than unity responses of the policy rate to inflation.

 

Milton Friedman had repeatedly suggested that an obstacle to a successful short term interest rate policy was that it needed vigorous responses to the state of the economy. John Taylor's June 1992 discussion had observed that the sluggishness of the interest rate targeting regime was a very significant lesson drawn from monetarism.

 

His response of 1.5 to inflation was in part motivated by this lesson. The Taylor rule, like some of the rules considered in the 1991 Leaper Study, therefore featured interest rate responses that had what Michael Woodford would later label the Taylor principle rule. With regard to the output gap response in the Taylor rule, Friedman could take some comfort from the fact that it reflected a message of his own work.

 

The Taylor rule embodied a zero output gap target. In keeping with Taylor's remark in 1988 I like to think of the ideal policy rule as minimizing the deviations of real output from normal or natural levels. The zero gap criterion was an obvious specification to Taylor as it captured the message of the natural rate hypothesis was directed toward output gap stabilization, not output per se.

 

Friedman was not, however, placated by this point because his objection to the output having the output gap in the policy rule centered instead on the likelihood of measurement errors involving the output gap. He had far less objection to a policy response that would respond to changes in really economic activity.

 

The notion that monetary policy should refrain from responses to the level of the output gap had some support among those active in the late 1990s in the research field, including Athanas Orphanides, but it was certainly a minority position remained a minority position. The Taylor rule work would generate a very large literature and in retrospect Taylor 1993 led the way to a surge in research activity concerned with viewing US Monetary policy via a framework centered on rules, in particular interest rate rules.

 

His characterization of US Monetary policy as following a parsimonious interest rate feedback rule gain ground with empirical studies of the reaction function, largely confirming that the Federal Reserve's average responses took the form that Taylor had specified. Several studies relaying aspects of this finding appeared most prominently Claret Agali and Gotler's 2000 QJE paper.

 

The main modifications that they made to the 1993 result were that the Taylor rule characterized well both the Volcker and Greenspan regimes, not just Greenspan and the dynamics appeared to feature in the estimated rule in the form of interest rate smoothing and the response to the expected future inflation rate rather than current inflation.

 

Estimated interest rate reaction functions showed that the response to inflation changed from below unity until the late 1970s to above unity thereafter. The agenda that the 1993 Taylor paper help set over the subsequent decade with Celtic Conference activity, including an NBR conference on monetary policy rules in January 1998 that many people here were here Monica mentioned many people here attended, organized by Taylor and the agenda was also reflected in the title of Chapter 1 of Michael Woodford's 2003 monograph Interest in Prices.

 

The title was the Return of monetary rules. In September 1997, Alan Greenspan gave a speech on policy rules at Stanford University in an event hosted by John with Friedman giving Greenspan's introduction. Greenspan's speech cited the attractive features of the Taylor rule, but also stated that these types of formulations are the best guideposts to help central banks, not inflexible rules that eliminate discretion.

 

Greenspan also acknowledged the upsurge in activity in the area of policy rules that the Taylor rule had helped generate. Greenspan noted that the Taylor Rule has attracted widening interest in recent years in the financial markets, the academic community and at central banks. In 1995, the Taylor Rule had started being part of the briefing materials provided at FOMC meetings, as we heard today.

 

And as for Milton Friedman, it deserves stress that it remained the case that Friedman was not completely won over. His ideal remained leaving the short term interest rate to market forces and adopting a reserves instrument. As Taylor himself had put it, some automaticity is lost when interest rates are targeted at least in comparison with targeting quantities.

 

And that remained Friedman's sentiment. Although Friedman was not fully reconciled to the Taylor Rule, Taylor benefited from the extensive dialogue that he had had with Friedman on that subject. And in an interview that John very kindly gave to me for my book on Friedman, one of the things that John said to me was, and I'll conclude with this, about himself and Friedman and the Taylor Rule.

 

And we talked about that a lot. And I don't know if I completely convinced him, but that was, I think, a fruitful exchange for me. In seeing his reaction to that, I'd say that I think he was generally quite positive about it. So thank you very much.

>> John Cochrane: That was wonderful.

 

Normally we do questions, but I see our dinner is out there and getting cold. So I think what we'll do is if you want to ask questions, stick around afterwards, bring them a drink and we'll get to talk some more. So have a good dinner.