PARTICIPANTS
Volker Wieland, John Taylor, Michael Bauer, Michael Bordo, Michael Boskin, Ruxandra Boul, Doug Branch, John Cochrane, Steve Davis, Sami Diaf, Andrew Filardo, Jared Franz, Paul Gregory, Joseph Gruber, Robert Hall, Rick Hanushek, Robert Hetzel, Norbert Holtkamp, Nicholas Hope, Ken Judd, Kevin Kliesen, Evan Koenig, Jeff Lacker, Mickey Levy, Brian Madigan, Axel Merk, Roger Mertz, Athanasios Orphanides, David Papell, Alvin Rabushka, Tom Scott, Tom Stephenson
ISSUES DISCUSSED
Volker Wieland, Endowed Chair of Monetary Economics at the Institute for Monetary and Financial Stability at Goethe University of Frankfurt, IMFS managing director, and former member of the German Council of Economic Experts (2013–2022), discussed “Taylor Rules and the Inflation Surge: The Case of the Fed,” a paper with Balint Tatar (German Council of Economic Experts).
John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator.
PAPER SUMMARY
The Federal Reserve has been publishing federal funds rate prescriptions from Taylor rules in its Monetary Policy Report since 2017. The signals from the rules aligned with Fed action on many occasions, but in some cases the Fed opted for a different route. This paper reviews the implications of the rules during the coronavirus pandemic and the subsequent inflation surge and derives projections for the future. In 2020, the Fed took the negative prescribed rates, which were far below the effective lower bound on the nominal interest rate, as support for extensive and long-lasting quantitative easing. Yet, the calculations overstate the extent of the constraint, because they neglect the supply side effects of the pandemic. The paper proposes a simple model-based adjustment to the resource gap used by the rules for 2020. In 2021, the rules clearly signaled the need for tightening because of the rise of inflation, yet the Fed waited until spring 2022 to raise the federal funds rate. With the decline of inflation over the course of 2023, the rules’ prescriptions have also come down. They fall below the actual federal funds rate target range in 2024. Several caveats concerning the projections of the interest rate prescriptions are discussed.
To read the paper click here
To read the slides, click here
WATCH THE SEMINAR
Topic: “Taylor Rules and the Inflation Surge: The Case of the Fed”
Start Time: April 17, 2024, 12:00 PM PT
