Wednesday, December 5, 2012

Discounting the ideas of John Taylor

I follow quite a few economics blogs and was pickled tink or something like that by what I found on Dr. John B. Taylor's blog a day or so ago. He wrote, "Like the Fed, the Hoover Press is experimenting with an extraordinary and unprecedented policy. It’s setting a key price very close to the zero lower bound and holding it there for a while." I didn't quite know what to make of this, but Dr. Taylor explained that The Taylor Rule and the Transformation of Monetary Policy, a book based on his work, is being listed for $2.88 on Amazon, as an e-book, and the hardcover is being sold at Hoover Press for $7.50 (you're welcome for the plug, Dr. Taylor).

Okay, so the prices are near the "zero lower bound", which I guess is a cute way of saying that it is really cheap. There is another way to interpret the zero lower bound that has to do with expectations.  As Simon Wren-Lewis, Paul Krugman and others have pointed out, one of the reasons that we are "at the zero lower bound" is that expectations have gotten very pessimistic, so expected future interest rates are quite low.  Maybe this is what has happened to the book The Taylor Rule and the Transformation of Monetary Policy as well.  Consumers may not believe that the book is that delaying purchasing it will significantly increase its price enough to justify buying the book in the present.  Look at it this way: the value of the knowledge that the book contains is such that purchasing it as an e-book on Amazon or buying a box of cereal a virtually identical proposition (just playing around, I know that's not great economics).

According to Dr. Taylor's blog, it seems that his Taylor Rule (version 1.0, 1993) indicated that the Fed should have raised(!) interest rates in late 2009, despite the lack of any serious recovery. Rather than suggest that maybe his 1993 rule was not optimal, he cast doubt on the policy rule which he came up with (version 3.0?) in 1999, which would have indicated that monetary policy has consistently been too tight since late 2008.

My main thought is: Dr. Taylor, had you ever considered that maybe 2% inflation is not the "optimal" amount? If the target were higher, the whole thing would have looked considerably different. I'll probably bring this up in a future post. I think Dr. Taylor has lost a lot of credibility because of his support of the insanity that the Romney campaign spewed, but also because his "too low for too long" theory of why the financial crisis occurred leaves much to be desired.

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