Thursday, April 30, 2015

Bernanke on the Taylor rule

The first two-thirds of my yearlong macro sequence in grad school was team-taught. Half of the classes were taught by Bob Hall. Hall is brilliant, but quirky, and overall he was not a very inspiring teacher. He shared the duties with a young fellow named Ben Bernanke. Bernanke was rigorous, clear, and practical-minded. An excellent teacher. These qualities are still apparent in his post-Fed Chair gig as a blogger. His latest post, on the Taylor rule, is exemplary. Sure, he's not a disinterested party when it comes to assessing recent Federal Reserve policy. But he is clear, careful, and fair. There are two main takeaways for me. First, Bernanke does a splendid job distinguishing between the Taylor rule as a statistical description of how the Fed has set policy in the past, and the Taylor rule as a potential normative guideline for setting optimal Fed policy now and in the future. Second, he shows that the normative advice that follows from applying the Taylor rule to current economic conditions is rather sensitive to certain key assumptions and parameters, on which reasonable people can disagree. For Bernanke, a rigid rule cannot replace considered discretion on the part of Fed policy makers.

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