This excerpt is drawn from A Celebration Honoring John B. Taylor’s Contributions to Economics and Monetary Policy (Hoover Institution Press, 2026). Buy a copy here.
John B. Taylor is one of the greatest macroeconomists of the past half century. He developed and articulated the “Taylor rule,” a systematic and strategic approach to central bank policy, recognizing that central banks set interest rates and not money supply. With this framework, he inherited from Milton Friedman the mantle of the most influential academic writer on monetary policy. And the Taylor approach, unlike Friedman’s monetary targeting approach, has been widely incorporated into central bank thinking and policy-making, at least as an ideal that central banks acknowledge even as they may deviate from it. John also made fundamental contributions to the underlying economics of monetary policy and to the empirical evaluation of monetary policies, as well as to international economics, fiscal policy, and other issues. And like Friedman, he also has been a prominent exponent, to popular as well as academic audiences, of the value of free markets, limited government, and free people.
John had an illustrious academic career before the Taylor rule was even a twinkling in his eye, though with hindsight we can see the ideas forming. In the late 1970s, macroeconomics underwent the rational-expectations revolution, which also included an emphasis on intertemporal decision making (meaning that people and businesses make decisions about now versus next year, not each moment in isolation) and rigorous economic underpinnings, in place of the static and ad hoc modeling used in IS- LM analysis, along with the spread of time series econometric modeling. John was a central part of this revolution.
The Taylor rule is all about the systematic, hence somewhat predictable, component of policy. The Taylor revolution says that the most important part of monetary policy is this systematic component—how interest rates react systematically and predictably to inflation and output. The effect of unpredictable “shocks” is less important. We should think of good Fed policy as a good set of systematic interest-rate responses to variables such as inflation and employment, not trying to measure (e.g., via vector autoregressions) the effects of interest-rate shocks and then trying to affect the economy by Fed-induced interest-rate shocks.
John Taylor’s famous solution to the rational expectations conundrum was to add staggered contracts. Workers and firms agree periodically to a wage, which lasts for a while. And they don’t do it all at the same time. With this little price-setting friction, even if workers and firms are completely rational at the time they agree to contracts, monetary shocks can have persistent output effects and systematic monetary policy can affect output. Sticky prices and wages can generate monetary non-neutrality with rational expectations, and, unlike one-period sticky information, sticky prices allow a persistent non-neutrality and a non-neutrality of expected policy. As Harald Uhlig writes in our new volume, “This is a powerful idea. One can and should argue that it rescued rational expectations by freeing it from being tied to the untenable prediction of monetary policy in effectiveness while rescuing its clean logical underpinning.”
“The rule”
Of course, John will be always remembered for his eponymous rule. (John is too humble to have named the rule after himself.) Richard Clarida writes in his chapter, “The two most consequential papers in monetary economics written over the past seventy-five years are Friedman (1968) and Taylor (1993a),” the latter being John’s most influential exposition of “the rule.”
The Taylor rule seems simple: the Fed should raise the interest rate by somewhat more than the rate of inflation and in response to higher output. However, the core of John’s argument, and the reason for its influence, is not just this simple rule.
First, John showed empirically that this rule fits well with the Federal Reserve’s policy during periods of good outcomes, for example the 1980s, and that bad outcomes were associated with policy that deviated from the rule, such as during the 1970s. He showed this in 1993, and in later work showed that the pattern continues afterward and in other countries. The Taylor rule started as an empirical observation. Many others have expanded on this empirical work.
Second, John never advocated that the Fed should follow a fixed or mechanical rule. Rather, the Taylor rule is a reference point. Central banks will always deviate in response to exigencies such as a financial crisis or a pandemic. John recommends that central banks start with the Taylor rule and understand and explain their actions as deviations from the rule. Doing so stabilizes expectations of how central banks will behave in the future. And expectations are the key to modern macroeconomics. Even in the breach of the rule, central banks now describe “anchoring expectations” as one of their main tasks.
Third, the Taylor rule is robust. The rule is not the optimal policy in any specific model. Optimal policies, such as those Taylor computed early in his career, respond to every variable available in complex ways that are hard to describe and evaluate. Moreover, models differ, and optimal policies differ too. The Taylor rule instead produces nearly optimal results in widely different models, models that differ in very fundamental basic issues.
The Taylor rule has also had a profound impact on economic theory. The rule, as explained by Edward Nelson in his chapter, was a bridge between the tradition of policy rules based on monetary aggregates, associated with Milton Friedman and the monetarists, and the actual practice by the Fed and other central banks that used interest rates as their policy tool. The Taylor rule provided a compromise between the two traditions while also advocating a reaction function that helped create a revival during the 1990s of economic research on monetary policy rules.
John was also influential because of his deep policy engagement. Writing one theory paper and moving on seldom leaves much impact in the practical world. We won’t even try to summarize the voluminous essays, testimony, speeches, op-eds, interviews, and trips to central banks around the world by which John patiently elaborated, applied, listened, and explained the rule, its application, and the underlying ideas of rule-based policy. He also continued his empirical and theoretical work.
In retrospect, John’s style is distinctive and creative. His models combine rational expectations, nominal contracts, and impressive model solution and estimation techniques with some remaining ad hoc elements, for example an aggregate demand curve. He did not follow the full general equilibrium purity that at the time characterized the real-business-cycle movement and a decade later would characterize the presentation of New Keynesian DSGE models. But that approach could not, at the time, talk about monetary policy at all. Even the purer models developed in later decades struggle to produce commonsense baseline results such as the dynamic effects on output, inflation, and exchange rates of an increase in interest rate targets or the money supply. And without those touchstones, central bankers would not begin to follow more complex normative advice.
John’s work here and later was always as pure as possible while retaining that practical usefulness.
In government and in the news
In addition to his career as a researcher and to his policy engagement, John had a varied and influential period of government service. He served as senior staff economist to the Council of Economic Advisers (CEA) from 1976 to 1977 under Presidents Ford and Carter, and as a CEA member from 1989 to 1991 under President George H. W. Bush. Later, John served as undersecretary of the treasury for international affairs from 2001 to 2005 for the George W. Bush administration. These were eventful years following 9/11. John used his expertise as an economist to create a team “to handle the financial side of the tumult in this period,” as he wrote in his book Global Financial Warriors (Hoover Institution Press, 2006), which covers many of John’s amazing experiences.
For instance, John and his team dealt with the economics of the occupation of Iraq after Saddam Hussein’s ouster; the creation of a new currency for Iraq; the debt left by Saddam; the financial reconstruction of Afghanistan after the US invasion; the Argentine currency and debt crisis of 2001–2; reform of the IMF, especially the adoption of collective action clauses in sovereign debt negotiations; and reform of the World Bank to make its lending more market-oriented, and many other issues.
John has also written prolifically in editorial pieces for popular news outlets, true to Hoover tradition followed by senior fellows including Milton Friedman, Thomas Sowell, and George Shultz. Since 1968, in additional to two hundred sixty-eight academic papers, he has written more than one hundred op-eds, including fifty-three for the Wall Street Journal, thirteen for Bloomberg, and ten for the Financial Times, many appearing in the aftermath of the global financial crisis.
All told, John’s academic and popular writings have had widespread influence on fiscal and monetary policy and financial regulation, as well as general economic policy.
