John B. Taylor
Encyclopedia
John Brian Taylor 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 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 rate
s should be determined and as a rough summary of how central bank
s 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.
. 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.
, 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.
Stanford University
The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...
, and the George P. Shultz Senior Fellow in Economics at Stanford University
Stanford University
The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...
's Hoover Institution
Hoover Institution
The Hoover Institution on War, Revolution and Peace is a public policy think tank and library founded in 1919 by then future U.S. president, Herbert Hoover, an early alumnus of Stanford....
.
Born in Yonkers, New York
Yonkers, New York
Yonkers is the fourth most populous city in the state of New York , and the most populous city in Westchester County, with a population of 195,976...
, he earned his A.B.
Bachelor of Arts
A Bachelor of Arts , from the Latin artium baccalaureus, is a bachelor's degree awarded for an undergraduate course or program in either the liberal arts, the sciences, or both...
from Princeton University
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
in 1968 and Ph.D.
Ph.D.
A Ph.D. is a Doctor of Philosophy, an academic degree.Ph.D. may also refer to:* Ph.D. , a 1980s British group*Piled Higher and Deeper, a web comic strip*PhD: Phantasy Degree, a Korean comic series* PhD Docbook renderer, an XML renderer...
from Stanford in 1973, both in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
. He taught at Columbia University
Columbia University
Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
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
Taylor rule
In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the...
, intended both as a recommendation about how nominal interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s should be determined and as a rough summary of how central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s actually do set them. He has been active in public policy, serving as the Under Secretary of the Treasury
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
for International Affairs during the first term of the George W. Bush Administration
George W. Bush administration
The presidency of George W. Bush began on January 20, 2001, when he was inaugurated as the 43rd President of the United States of America. The oldest son of former president George H. W. Bush, George W...
. 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
George H. W. Bush
George Herbert Walker Bush is an American politician who served as the 41st President of the United States . He had previously served as the 43rd Vice President of the United States , a congressman, an ambassador, and Director of Central Intelligence.Bush was born in Milton, Massachusetts, to...
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 contributed to the development of mathematical methods for solving macroeconomic models under the assumption of rational expectationsRational expectations
Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...
. 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
Edmund Phelps
Edmund Strother Phelps, Jr. is an American economist and the winner of the 2006 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. Early in his career he became renowned for his research at Yale's Cowles Foundation in the first half of the 1960s on the sources of economic growth...
, simultaneously with Stanley Fischer
Stanley Fischer
Stanley "Stan" Fischer is an American-Israeli economist and the current Governor of the Bank of Israel. He previously served as Chief Economist at the World Bank.-Biography:...
, showed that monetary policy is useful for stabilizing the economy if wages are sticky
Sticky (economics)
Sticky, in the social sciences and particularly economics, describes a situation in which a variable is resistant to change. Sticky prices are an important part of macroeconomic theory since they may be used to explain why markets might not reach equilibrium right away. Nominal wages are often said...
, even when all workers and firms have rational expectations. This demonstrated that some of the earlier insights of Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
remained true under rational expectations. This was important because Thomas Sargent and Neil Wallace
Neil Wallace
Neil Wallace is an American economist and professor at Pennsylvania State University. Wallace is considered one of the main proponents of new classical macroeconomics....
had argued that rational expectations would make macroeconomic policy useless for stabilization
Policy Ineffectiveness Proposition
The Policy Ineffectiveness Proposition is a new classical theory proposed in 1976 by Thomas J. Sargent and Neil Wallace based upon the theory of rational expectations...
; 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
New Keynesian economics
New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.Two main assumptions define the New...
that rebuilt much of the traditional macromodel on rational expectations microfoundations
Microfoundations
In economics, the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a macroeconomic theory....
.
Taylor went on to explore what types of monetary policy rules would most effectively reduce the social costs of business cycle fluctuations
Welfare cost of business cycles
In macroeconomics, the welfare cost of business cycles refers to the decrease in social welfare, if any, caused by 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
Taylor rule
In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the...
, 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 GreenspanAlan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
, 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
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
opinion section, he recommended four measures to fight the economic downturn: (a) permanently keeping all income tax rates
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
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
Stimulus (economic)
In economics, stimulus refers to attempts to use monetary or fiscal policy to stimulate the economy. Recently "stimulus" has become particularly associated with Keynesian economics and the theory that government spending projects can generate economic growth in a recession...
plan that also meets long term objectives against waste
Pork barrel
Pork barrel is a derogatory term referring to appropriation of government spending for localized projects secured solely or primarily to bring money to a representative's district...
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
Bloomberg Television
Bloomberg Television is a 24-hour global network broadcasting business and financial news. It is distributed globally, reaching over 200 million homes worldwide. It is owned and operated by Bloomberg L.P...
, Taylor stressed the importance of long term fiscal reform that sets the U.S. federal budget
United States federal budget
The Budget of the United States Government is the President's proposal to the U.S. Congress which recommends funding levels for the next fiscal year, beginning October 1. Congressional decisions are governed by rules and legislation regarding the federal budget process...
on a path towards being balanced. He cautioned that the Fed should move away from quantitative easing
Quantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
measures and keep to a more static, stable monetary policy. He also criticized fellow economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
'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
See also
- Members of the Hoover Institution
- Taylor ruleTaylor ruleIn economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the...
- Monetary policyMonetary policyMonetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
- New Keynesian economicsNew Keynesian economicsNew Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.Two main assumptions define the New...
- Rational expectationsRational expectationsRational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...