John B. Taylor

For other people named John Taylor, see John Taylor (disambiguation).

John B. Taylor

New Keynesian economics
John B. Taylor
Born	December 8, 1946 (1946-12-08) Yonkers, New York
Nationality	United States
Institution	Stanford University
Field	Monetary economics
Alma mater	Shady Side Academy Stanford University Princeton University
Influences	Milton Friedman John Maynard Keynes Paul Volcker
Contributions	Taylor rule
Information at IDEAS/RePEc

John Brian Taylor (born December 8, 1946) is the Mary and Robert Raymond Professor of Economics at Stanford University, and the George P. Shultz Senior Fellow in Economics at Stanford University's Hoover Institution.

Born in Yonkers, New York, he graduated from Shady Side Academy and earned his A.B. from Princeton University in 1968 and Ph.D. from Stanford in 1973, both in economics. He taught at Columbia University from 1973–1980 and the Woodrow Wilson School and Economics Department of Princeton University from 1980–1984 before returning to Stanford. He has received several teaching prizes and teaches Stanford's introductory economics course as well as Ph.D. courses in monetary economics.

In a 1993 paper he proposed the Taylor rule, intended both as a recommendation about how nominal interest rates should be determined and as a rough summary of how central banks actually do set them. He has been active in public policy, serving as the Under Secretary of the Treasury for International Affairs during the first term of the George W. Bush Administration. His book Global Financial Warriors chronicles this period. He was a member of the President's Council of Economic Advisors during the George H. W. Bush Administration and Senior Economist at the Council of Economic Advisors during the Ford Administration.

Thomson Reuters lists Taylor among the 'citation laureates' who are likely future winners of the Nobel Prize in Economics.

Academic contributions

Taylor’s research has had a major impact on economic theory and policy. Federal Reserve Chairman Ben Bernanke has said that Taylor's “influence on monetary theory and policy has been profound,” and Federal Reserve Vice Chair Janet Yellen has noted that Taylor's work “has affected the way policymakers and economists analyze the economy and approach monetary policy."

Taylor contributed to the development of mathematical methods for solving macroeconomic models under the assumption of rational expectations. In 1975 he showed how gradual learning could be incorporated in models with rational expectations; his 1979 Econometrica paper presented one of the first econometric models with overlapping price setting and rational expectations, which he later expanded into a large multicountry model.

In 1977, Taylor and Edmund Phelps, simultaneously with Stanley Fischer, showed that monetary policy is useful for stabilizing the economy if wages are sticky, even when all workers and firms have rational expectations. This demonstrated that some of the earlier insights of Keynesian economics remained true under rational expectations. This was important because Thomas Sargent and Neil Wallace had argued that rational expectations would make macroeconomic policy useless for stabilization; the results of Taylor, Phelps, and Fischer showed that Sargent and Wallace's crucial assumption was not rational expectations, but perfectly flexible prices. Taylor's model of overlapping wage contracts became one of the building blocks of the New Keynesian macroeconomics that rebuilt much of the traditional macromodel on rational expectations microfoundations.

Taylor went on to explore what types of monetary policy rules would most effectively reduce the social costs of business cycle fluctuations: should central banks try to control the money supply, the price level, or the interest rate; and should these instruments react to changes in output, unemployment, asset prices, or inflation rates? He showed that there was a tradeoff—later called the Taylor curve—between the volatility of inflation and that of output. Taylor's 1993 paper in the Carnegie-Rochester Conference Series proposed that a simple and effective central bank policy would manipulate short-term interest rates, raising rates to cool the economy whenever inflation or output growth becomes excessive, and lowering rates when either one falls too low. Taylor's interest rate equation has come to be known as the Taylor rule, and it is now widely accepted as an effective formula for monetary decision making.

A key stipulation of the Taylor rule, sometimes called the Taylor principle, is that the nominal interest rate should increase by more than one percentage point for each one-percent rise in inflation. Some empirical estimates indicate that many central banks today act approximately as the Taylor rule prescribes, but violated the Taylor principle during the inflationary spiral of the 1970s.

Recent research

Taylor's recent research has been on the financial crisis that began in 2007 and the world economic recession. He finds that the crisis was primarily caused by flawed macroeconomic policies from the U.S. government and other governments. Particularly, he focuses on the Federal Reserve which, under Alan Greenspan, a personal friend of Taylor, created "monetary excesses" in which interest rates were kept too low for too long, which then directly led to the housing boom in his opinion. He also believes that Freddie Mac and Fannie Mae spurred on the boom and that the crisis was misdiagnosed as a liquidity rather than a credit risk problem. He wrote that, "government actions and interventions, not any inherent failure or instability of the private economy, caused, prolonged, and worsened the crisis"

Taylor’s research has also examined the impact of fiscal policy in the recent recession. In November 2008, writing for The Wall Street Journal opinion section, he recommended four measures to fight the economic downturn: (a) permanently keeping all income tax rates the same, (b) permanently creating a worker's tax credit equal to 6.2 percent of wages up to $8,000, (c) incorporating "automatic stabilizers" as part of overall fiscal plans, and (d) enacting a short-term stimulus plan that also meets long term objectives against waste and inefficiency. He stated that merely temporary tax cuts would not serve as a good policy tool.

In a June 2011 interview on Bloomberg Television, Taylor stressed the importance of long term fiscal reform that sets the U.S. federal budget on a path towards being balanced. He cautioned that the Fed should move away from quantitative easing measures and keep to a more static, stable monetary policy. He also criticized fellow economist Paul Krugman's advocacy of additional stimulus programs from Congress, which Taylor said will not help in the long run.

Selected publications

• Taylor, John B. (1975), ‘Monetary Policy During a Transition to Rational Expectations.’ Journal of Political Economy 83 (5), pp. 1009–1021.
• Phelps, Edmund S., and John B. Taylor (1977), 'Stabilizing powers of monetary policy under rational expectations.' Journal of Political Economy 85 (1), pp. 163–90.
• Taylor, John B. (1979), 'Staggered wage setting in a macro model'. American Economic Review, Papers and Proceedings 69 (2), pp. 108–13. Reprinted in N.G. Mankiw and D. Romer, eds., (1991), New Keynesian Economics, MIT Press.
• Taylor, John B. (1979), 'Estimation and control of a macroeconomic model with rational expectations'. Econometrica 47 (5), pp. 1267–86.
• Taylor, John B. (1986), 'New econometric approaches to stabilization policy in stochastic models of macroeconomic fluctuations'. Ch. 34 of Handbook of Econometrics, vol. 3, Z. Griliches and M.D. Intriligator, eds. Elsevier Science Publishers.
• Taylor, John B. (1993), 'Discretion versus policy rules in practice'. Carnegie-Rochester Conference Series on Public Policy 39, pp. 195-214.
• Taylor, John B. (1999), 'An historical analysis of monetary policy rules'. Ch. 7 of John B. Taylor, ed., Monetary Policy Rules, University of Chicago Press. Paperback edition (2001): ISBN 0226791254.
• Taylor, John B. (2007) Global Financial Warriors, WW Norton, N.Y.
• Taylor, John B. (2007), “Housing and Monetary Policy,” in Jackson Hole Symposium on Housing, Housing Finance, and Monetary Policy, Federal Reserve Bank of Kansas City.
• Taylor, John B. (2008), “The Financial Crisis and the Policy Response: An Empirical Analysis of What Went Wrong,” Festschrift in Honor of David Dodge’s Contributions to Canadian Public Policy, Bank of Canada, Nov. 2008, pp. 1–18.
• Taylor, John B. (2009), "Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Hoover Institution Press. ISBN 0817949712
• Scott, Kenneth E., George P. Shultz, and John B. Taylor (2010), "Ending Government Bailouts as We Know Them," Hoover Institution Press. ISBN 0817911243
• Taylor, John B. (2012), "First Principles: Five Keys to Restoring America's Prosperity," W. W. Norton & Company. ISBN 0393073394

See also

• Members of the Hoover Institution
• Members of Stanford University's Economics Department
• Taylor rule
• Monetary policy
• New Keynesian economics
• Rational expectations

External links

• Taylor's Official Web Site
• Taylor's blog
• Stanford Economics Faculty Profile
• Conference to celebrate the tenth anniversary of the Taylor rule proposal
• Fed Conference on John Taylor’s Contributions to Monetary Theory and Policy