Tags: Taylor | Bernanke | monetary | policy

Stanford's John Taylor: Bernanke Is Wrong in Critique of Rules-Based Monetary Policy

By    |   Tuesday, 05 May 2015 09:27 AM

Stanford University economist John Taylor thinks former Federal Reserve Chairman Ben Bernanke is off base in his recent criticism of rules-based monetary policy.

Bernanke's criticism, which came in a blog last week, focuses on Taylor's own idea, known as the Taylor rule. The former Fed chairman makes a mistake in calling his rule inflexible, Taylor writes in The Wall Street Journal.

"I never thought that policy should be mechanical and still don’t," he says.

"Some people say that I want to chain the Fed to an algebraic formula, but that is not what I have written or said. Having a rules-based policy for your instruments does not mean you mechanically follow a formula. It means you have an explicit strategy for setting the instruments. The same is true for my recommendation regarding legislation."

Bernanke is more criticizing rules-based policy in general than specific rules, says Taylor, who was an official in several presidential administrations, including both Bushes.

"He prefers 'constrained discretion,'" Taylor says of Bernanke. As I see it, the broader evidence in the United States and in many other countries that Ben does not mention is that a rules-based policy has worked and that discretion — constrained or otherwise — has not."

Meanwhile, you can count legendary investor Warren Buffett among those who believes the Federal Reserve will remain cautious about raising rates.

That's partly due to our sluggish economy — GDP grew only 0.2 percent in the first quarter — and partly due to the negative interest rates prevailing in most of the eurozone, he told CNBC.

"I think it would be very hard for the Fed to bump rates up here with negative rates in Europe," Buffett said. The two-year German government bond yields negative 0.22 percent.

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. And most economists don't expect it to begin raising rates until at least September.

As for the economy, Buffett doesn't think it's performing too badly. Even with an annual growth rate of just 2.2 percent since the recession ended in 2009, the economy is "doing well," Buffett said.

"We might like to see more growth, [but] 1 percent inflation means that in a generation things improved 20 percent per capita, and that's another $10,000 of GDP per capita in one generation. That's fabulous."

Consumer prices slipped 0.1 percent in the 12 months through March.

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Stanford University economist John Taylor thinks former Federal Reserve Chairman Ben Bernanke is off base in his recent criticism of rules-based monetary policy.
Taylor, Bernanke, monetary, policy
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2015-27-05
Tuesday, 05 May 2015 09:27 AM
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