If you have been reading this blog for a while, you know I don’t think there is much role for the Taylor Rule or other reductionist policy rules in the current environment.
I suspect that the Fed is hesitant to be plain about this because they fear criticism that they are flying blind and conducting policy on the basis of whim. As Taylor himself has said, “nobody knows what you are doing.” That was not meant as a compliment.
Yesterday, I noticed a couple links on Mark Thoma’s site that fit into this story pretty neatly. The first was to the Atlanta Fed’s website describing a “utility” that allows the user to rejigger the Taylor Rule to generate whatever interest rate he or she likes.
The Atlanta Fed, then, provides its visitors the ability to pretend they are following a Taylor Rule even as they are not. The Atlanta Fed does not speak for the whole system, obviously, but that is pretty telling of the spirit of the times, I think.
The second link was more of a revelation to me because I had not realized that the Taylor Rule was anchored in a moral premise, the superiority of the rule of law over arbitrary authority. That may seem a bit grandiose, and maybe it is. Maybe the author reads too much in. But I thought this article by Peter Mehrling at the Insitute for New Economic Thinking was really interesting, especially the following passage:
From this point of view, Henry Simons, in his famous 1936 ” Rules Versus Authorities”, did us all a disservice by overlaying this perennial monetary debate onto the most pressing debate of his own time: Economics versus Politics, Liberalism versus Socialism, Rule of Law versus Arbitrary Authority, Freedom versus Tyranny. After Simons’ overlay, it was no longer possible to consider the possible virtues of the opposing position, if only for a different time or a different place. One side was right, and the other was wrong, on moral and principled grounds, no room for debate, are you with us or against us?
To me, that seems truthy. It is something I am inclined to believe uncritically, I concede. But if this subject interests you, you might want to read through the essay. It is not mostly about the moral foundations, but it addresses them. Maybe to those with a better sense of history, this is obvious stuff. For me, it allows a dime to drop.