Advancing a Free Society

Taylor Rule II Shows Which Fed Policies Work Best

Monday, January 24, 2011

By Amity Shlaes

The reason Hu Jintao decided to visit the U.S. this month is that the Chinese leader wants to know when the U.S. economy and its currency will be stable and strong again. It’s good the Chinese are known for patience because Hu may have to wait a while.

At least that’s the view according to John Taylor, a Stanford University economist who has influenced Federal Reserve policies in the past.

Fed officials often refer to the Taylor Rule, a formula devised by Taylor that shows how a central bank should manage interest rates in response to inflation and other data. At a recent joint lunch of the American Economics Association and the American Finance Association, Taylor, a Treasury undersecretary in President George W. Bush’s administration, delivered a second, equally interesting, rule.

Continue reading Amity Shlaes at Bloomberg…