Tags: John Taylor | Federal Reserve | rules | economy

John Taylor: Fed Needs to Adopt Monetary Rules to Boost Economy

By    |   Wednesday, 16 July 2014 10:30 AM

The economy has grown at a disappointing 2-percent pace since the recession ended in 2009, despite the Federal Reserve's massive easing program.

If the Fed wants to spark economic improvement, it must adopt a rules-based policy, says Stanford University economist John Taylor.

"When monetary policy became more rules-based during the 1980s, 1990s and until recently, the economy improved and we got what economists call the Great Moderation of strong economic growth with declining unemployment and inflation," he writes in The Wall Street Journal.

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"When policy became more ad hoc, interventionist and discretionary during the past decade, the economy deteriorated, and we got a financial crisis, a Great Recession, and a not-so-great recovery."

A welcome step toward monetary reform would be the Federal Reserve Accountability and Transparency Act, which was recently introduced in the House, Taylor states.

It would make the Fed publicly state a rule or strategy for how its policy instruments would change in response to changes in inflation and other measures of economic performance.

"Some will say that the legislation would destroy central-bank independence. But since the Fed chooses its own rule, its independence is maintained. The purpose of the act is to prevent the damaging departures from rules-based policy, which central-bank independence obviously has not prevented," he argues.

Others find flaws with current Fed policy too.

"The whole financial system and economy of the United States is now a laboratory experiment, as macroprudential policies are put in place by those very people who failed to understand or correct the excesses that developed in the last financial crisis," bank analyst Dick Bove of Rafferty Capital Markets writes in a commentary obtained by CNBC.

"More problematic is the fact that macroprudential policy requires regulators to control the growth and direction of the U.S. economy. It denies the right of the private sector to grow in any direction it chooses without the explicit control of the government. It is anti-capitalistic."

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The economy has grown at a disappointing 2-percent pace since the recession ended in 2009, despite the Federal Reserve's massive easing program.
John Taylor, Federal Reserve, rules, economy
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2014-30-16
Wednesday, 16 July 2014 10:30 AM
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