John B. Taylor

For other people named John Taylor, see John Taylor (disambiguation).
John B. Taylor
Born (1946-12-08) December 8, 1946
Yonkers, New York
Nationality United States
Institution Stanford University
Field Monetary economics
School or
tradition		 New Keynesian economics
Alma mater Shady Side Academy
Stanford University
Princeton University
Doctoral
advisor		 Theodore Wilbur Anderson[1]
Influences Milton Friedman
Paul Volcker
E. Philip Howrey
Alan Greenspan
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.[2]

Born in Yonkers, New York, he graduated from Shady Side Academy[3] 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.[4]

In research published in 1979 and 1980 he developed a model of price and wage setting—called the staggered contract model—which served as an underpinning of a new class of empirical models with rational expectations and sticky prices—sometimes called new Keynesian models.[5][6] In a 1993 paper he proposed the Taylor rule,[7] intended as a recommendation about how nominal interest rates should be determined, which then became 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.[8] 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 and Carter Administrations.

In 2012 he was included in the 50 Most Influential list of Bloomberg Markets Magazine. Thomson Reuters lists Taylor among the 'citation laureates' who are likely future winners of the Nobel Prize in Economics.[9]

Academic contributions

Taylor’s research—including the staggered contract model, the Taylor rule, and the construction of a policy tradeoff (Taylor) curve[10] employing empirical rational expectations models[11]–has had a major impact on economic theory and policy.[12] Former Federal Reserve Chairman Ben Bernanke has said that Taylor's “influence on monetary theory and policy has been profound,”[13] and Federal Reserve Chair Janet Yellen has noted that Taylor's work “has affected the way policymakers and economists analyze the economy and approach monetary policy."[14]

Taylor contributed to the development of mathematical methods for solving macroeconomic models under the assumption of rational expectations, including in a 1975 Journal of Political Economy paper, in which he showed how gradual learning could be incorporated in models with rational expectations;[15] a 1979 Econometrica paper in which he presented one of the first econometric models with overlapping price setting and rational expectations,[16] which he later expanded into a large multicountry model in a 1993 book Macroeconomic Policy in a World Economy;[11] and a 1983 Econometrica paper,[17] in which he developed with Ray Fair the first algorithm to solve large-scale dynamic stochastic general equilibrium models which became part of popular solution programs such as Dynare and EViews.[18]

In 1977, Taylor and Edmund Phelps, simultaneously with Stanley Fischer, showed that monetary policy is useful for stabilizing the economy if prices or wages are sticky, even when all workers and firms have rational expectations.[19] 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;[20] the results of Taylor, Phelps, and Fischer showed that Sargent and Wallace's crucial assumption was not rational expectations, but perfectly flexible prices.[21] These research projects together could considerably deepen our understanding of the limits of the policy-ineffectiveness proposition.[22]

Taylor then developed the staggered contract model of overlapping wage and price setting, which became one of the building blocks of the New Keynesian macroeconomics that rebuilt much of the traditional macromodel on rational expectations microfoundations.[23][24]

Taylor’s research on monetary policy rules traces back to his undergraduate studies at Princeton.[25][26] He went on in the 1970s and 1980s to explore what types of monetary policy rules would most effectively reduce the social costs of inflation and 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[27] that there was a tradeoff—later called the Taylor curve[28]—between the volatility of inflation and that of output. Taylor's 1993 paper in the Carnegie-Rochester Conference Series on Public Policy 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.[7] 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.[29]

A key stipulation of the Taylor rule, sometimes called the Taylor principle,[30] 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.[31]

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.[32] 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.[33] He wrote that, "government actions and interventions, not any inherent failure or instability of the private economy, caused, prolonged, and worsened the crisis."[34]

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.[35] His research[36] with John Cogan, Tobias Cwik, and Volcker Wieland showed that the multiplier is much smaller in new Keynesian than in old Keynesian models, a result that was confirmed by researchers at central banks.[37] He evaluated the 2008 and 2009 stimulus packages and argued that they were not effective in stimulating the economy.[38]

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.[39] In his 2012 book First Principles: Five Keys to Restoring America’s Prosperity, he endeavors to explain why these reforms are part of a broader set of principles of economic freedom.

Selected publications

Reprinted in Taylor, John B. (1991), "Staggered wage setting in a macro model", in Mankiw, N. Gregory; Romer, David, New Keynesian economics, volume 1, Cambridge, Massachusetts: MIT Press, pp. 233–242, ISBN 9780262631334. 

See also

Further reading

References

  1. ↑ Taylor, John B. (September 24, 2016). "The Statistical Analysis of Policy Rules". economicsone.com/. Economics One (A blog by John B. Taylor). Retrieved October 2, 2016.
  2. ↑ "Hoover Institution Senior Fellow: Biography". Hoover Institution. Retrieved 27 October 2011.
  3. ↑ "Notable alumni". shadysideacademy.org. Shady Side Academy.
  4. ↑ Taylor, John B. "Curriculum vitae" (pdf). Stanford University.
  5. ↑ Taylor, John B. (May 1979). "Staggered wage setting in a macro model". The American Economic Review. American Economic Association. 69 (2): 108–113. JSTOR 1801626.
    Reprinted in Taylor, John B. (1991), "Staggered wage setting in a macro model", in Mankiw, N. Gregory; Romer, David, New Keynesian economics, volume 1, Cambridge, Massachusetts: MIT Press, pp. 233–242, ISBN 9780262631334.
  6. ↑ Taylor, John B. (February 1980). "Aggregate dynamics and staggered contracts". Journal of Political Economy. Chicago Journals. 88 (1): 1–23. doi:10.1086/260845. JSTOR 1830957.
  7. 1 2 Taylor, John B. (December 1993). "Discretion versus policy rules in practice". Carnegie-Rochester Conference Series on Public Policy. Elsevier. 39: 195–214. doi:10.1016/0167-2231(93)90009-L. Pdf.
  8. ↑ Taylor, John B. (2007). Global financial warriors: the untold story of international finance in the post-9/11 world. New York: W.W. Norton. ISBN 9780393064483.
  9. ↑ "Hall of 'citation laureates' (in economics)". science.thomsonreuters.com. Thomson-Reuters.
  10. ↑ Taylor, John B. (September 1979). "Estimation and control of a macroeconomic model with rational expectations". Econometrica. Wiley. 47 (5): 1267–1286. doi:10.2307/1911962. JSTOR 1911962. Pdf.
    Reprinted in Taylor, John B. (1981), "Estimation and control of a macroeconomic model with rational expectations", in Lucas, Jr., Robert E.; Sargent, Thomas J., Rational expectations and econometric practice, Minneapolis: University of Minnesota Press, ISBN 9780816610983.
  11. 1 2 Taylor, John B. (1993). Macroeconomic policy in a world economy: from econometric design to practical operation. New York: W.W. Norton. ISBN 9780393963168.
  12. ↑ Ben Bernanke refers to the “three concepts named after John that are central to understanding our macroeconomic experience of the past three decades—the Taylor curve, the Taylor rule, and the Taylor principle.” in “Opening Remarks,” Conference on John Taylor’s Contributions to Monetary Theory and Policy
  13. ↑ Bernanke, Ben (2007). Opening Remarks. Remarks at the Conference on John Taylor's Contributions to Monetary Theory and Policy.
  14. ↑ Yellen, Janet (2007). Policymaker Roundtable (PDF). Remarks at the Conference on John Taylor's Contributions to Monetary Theory and Policy.
  15. ↑ Taylor, John B. (October 1975). "Monetary policy during a transition to rational expectations". Journal of Political Economy. Chicago Journals. 83 (5): 1009–1022. doi:10.1086/260374. JSTOR 1830083.
  16. ↑ Taylor, John B. (September 1979). "Estimation and control of a macroeconomic model with rational expectations". Econometrica. Wiley. 47 (5): 1267–1286. doi:10.2307/1911962. JSTOR 1911962.
  17. ↑ Taylor, John B.; Fair, Ray C. (July 1983). "Solution and maximum likelihood estimation of dynamic nonlinear rational expectations models". Econometrica. Wiley. 51 (4): 1169–1185. doi:10.2307/1912057. JSTOR 1912057.
  18. ↑ Judd, Kenneth; Kubler, Felix; Schmedders, Karl (2003), "Computational methods for dynamic equilibria with heterogeneous agents", in Dewatripont, Mathias; Hansen, Lars Peter; Turnovsky, Stephen J., Advances in economics and econometrics theory and applications (volume 3), Cambridge, U.K. New York: Cambridge University Press, p. 247, ISBN 9781280163388 and “Eviews Users Guide II.”
  19. ↑ Taylor, John B.; Phelps, Edmund S. (February 1977). "Stabilizing powers of monetary policy under rational expectations". Journal of Political Economy. Chicago Journals. 85 (1): 163–190. doi:10.1086/260550. JSTOR 1828334.
  20. ↑ Sargent, Thomas; Wallace, Neil (April 1975). "'Rational' expectations, the optimal monetary instrument, and the optimal money supply rule". Journal of Political Economy. Chicago Journals. 83 (2): 241–254. doi:10.1086/260321. JSTOR 1830921.
  21. ↑ Blanchard, Olivier (2000), "Epliogue", in Blanchard, Olivier, Macroeconomics (2nd ed.), Upper Saddle River, New Jersey: Prentice-Hall, p. 543, ISBN 9780130557872.
  22. ↑ Galbács, Peter (2015). The theory of new classical macroeconomics: a positive critique. Heidelberg / New York / Dordrecht / London: Springer. doi:10.1007/978-3-319-17578-2. ISBN 9783319175782.
  23. ↑ King, Robert G.; Wolman, Alexander (1999), "What should the monetary authority do when prices are sticky?", in Taylor, John B., Monetary policy rules, Chicago: University of Chicago Press, ISBN 9780226791265.
  24. ↑ Taylor, John B. (1999), "Staggered price and wage setting in macroeconomics", in Taylor, John B.; Woodford, Michael, Handbook of macroeconomics, Amsterdam New York: North-Holland Elsevier, pp. 1009–1050, ISBN 9780444501585.
  25. ↑ Taylor, John B. (April 1968). Fiscal and monetary stabilization policies in a model of endogenous cyclical growth (BA thesis). Princeton University.
  26. ↑ Taylor, John B. (October 1968). "Fiscal and monetary stabilization policies in a model of endogenous cyclical growth" (pdf). Research Memorandum No. 104. Econometric Research Program, Princeton University. OCLC 22687344.
  27. ↑ Taylor, John B. (September 1979). "Estimation and control of a macroeconomic model with rational expectations". Econometrica. Wiley. 47 (5): 1267–1286. doi:10.2307/1911962. JSTOR 1911962.
  28. ↑ Bernanke, Ben (2004). The Great Moderation. Remarks at the meeting of the Eastern Economic Association.
  29. ↑ Orphanides, Athanasios (2007). Taylor rules (pdf). Finance and Economics Discussion Series 2007–18. Federal Reserve Board.
  30. ↑ Davig, Troy; Leeper, Eric M. (June 2007). "Generalizing the Taylor Principle". The American Economic Review. American Economic Association. 97 (3): 607–635. JSTOR 30035014. NBER Working Paper 11874, December 2005.
  31. ↑ Clarida, Richard; Galí, Jordi; Gertler, Mark (February 2000). "Monetary policy rules and macroeconomic stability: evidence and some theory". Quarterly Journal of Economics. Oxford Journals. 115 (1): 147–180. doi:10.1162/003355300554692. Pdf.
  32. ↑ Taylor, John B. (2008), "Housing and monetary policy", in Reserve Bank of Kansas City, Housing, housing finance, and monetary policy: a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 30-September 1, 2007, Kansas City, Missouri: Reserve Bank of Kansas City, pp. 463–476, OCLC 170267547
  33. ↑ Taylor, John B. (2009), "The financial crisis and the policy response: an empirical analysis of what went wrong (housing and monetary policy)", in Bank of Canada Staff, Festschrift in honour of David Dodge's contributions to Canadian public policy: proceedings of a conference held by the Bank of Canada, November, 2008, Ottawa: Bank of Canada, pp. 1–18, ISBN 9780660199276.
  34. ↑ Taylor, John B. (February 9, 2009). "How government created the financial crisis". The Wall Street Journal. p. A19. Pdf.
  35. ↑ Taylor, John B. (November 25, 2008). "Why permanent tax cuts are the best stimulus". The Wall Street Journal. Retrieved June 30, 2011.
  36. ↑ Taylor, John B.; Cogan, John F.; Cwik, Tobias; Wieland, Volker (March 2010). "New Keynesian versus old Keynesian government spending multipliers". Journal of Economic Dynamics and Control. Elsevier. 34 (3): 281–295. doi:10.1016/j.jedc.2010.01.010.
  37. ↑ Coenen, Guenter; et al. (September 2011). "Effects of fiscal stimulus in structural models". American Economic Journal: Microeconomics. American Economic Association. 4 (1): 22–68. doi:10.1257/mac.4.1.22. Pdf.
  38. ↑ Taylor, John B. (September 2011). "An empirical analysis of the revival of fiscal activism in the 2000s". Journal of Economic Literature. American Economic Association. 49 (3): 686–702. doi:10.1257/jel.49.3.686. JSTOR 23071727. Pdf.
  39. ↑ "Taylor Says U.S. Needs `Sound' Monetary, Fiscal Policies". Bloomberg Television thru Washington Post. June 27, 2011. Retrieved June 30, 2011.

External links

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