John Taylor, the George P. Shultz Senior Fellow in Economics at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University, testified before the Joint Economic Committee on Thursday, April 18, 2013. His testimony was titled “The Fed at 100: Can Monetary Policy Close the Growth Gap and Promote a Sound Dollar?” According to Taylor, the Federal Reserve’s recent departure from a rules-based monetary policy has had an adverse effect on the economy; the gains from a return to a steadier policy would close the growth gap and maintain the purchasing power of the currency.
Taylor explains why the departure of a rules-based monetary policy during the past decade has harmed the economy. “Monetary policy has consisted mainly of highly discretionary and unpredictable changes in the policy instruments in recent years, and, largely as a result, economic performance has not been good. We have had a deep recession and a very slow recovery, which have together created a huge growth gap—a main focus of this hearing. The persistent difference between potential GDP and real GDP illustrates the growth gap,” stated Taylor.
Taylor also discussed ways in which monetary policy can be focused so as to have a successful rules-based policy system. “The most straightforward way to make such a rule an integral part of monetary policy would be to reinstate the formal reporting requirement for the instruments of policy that was removed from the Federal Reserve Act in 2000. But rather than focus only on money growth, as the requirement previously did, it would focus directly on a rule-like response of the short-term interest rate or some other appropriate instrument that the Fed can control,” stated Taylor.
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Taylor testified before the House Subcommittee on Monetary Policy and Trade Committee on Financial Services on Tuesday, March 5, 2013, on the Federal Reserve’s handling of monetary policy before, during, and after the financial crisis. Click here for more information.
Click here for more information on Taylor’s testimony in September 2012 before the US House of Representatives’ Committee on the Judiciary.