Bingo! on each point you've made, especially the one about the "optionality" in the Taylor Rule. (If I may say so, at my own expense, you have underpriced your blog!). Another thing, if I may, about the Taylor Rule. Unemployment can go up, say from 3.5% to 4.5%, in three ways. 1) Layoffs 2) Improved participation rate 3) Mix of (1) and (…
Bingo! on each point you've made, especially the one about the "optionality" in the Taylor Rule. (If I may say so, at my own expense, you have underpriced your blog!). Another thing, if I may, about the Taylor Rule. Unemployment can go up, say from 3.5% to 4.5%, in three ways. 1) Layoffs 2) Improved participation rate 3) Mix of (1) and (2). If you set aside the inflation segment of the Rule for the moment, it would recommend only one course of action for all. But the underlying economy is different in each scenario. An economy where unemployment is up due to mass layoffs is different from one in which unemployment is up because people are drawn into the labor force when jobs become easier to find. They are counted as unemployed during search.
Who, except Taylor, thinks the Taylor rule is optimal? (And the Fed's mandate does not say minimize unemployment, but pot maximize employment, anyway.) The mandate ought to be understood as requiring the Fed to shoot for maintaining an optimum rate of inflation that maximizes discounted real income, taking into account the costs of inflation that is both too high and too low, costs that arise from upward and downward rigidities in relative prices and the time required for market participants to approximate quasi-equilibrating relative prices. The mandate is really silent about how quickly the Fed should attempt to return inflation to the (optimum) target. That would depend on the costs of over or under target inflation and the risks of overshooting in the opposite direction.
Bingo! on each point you've made, especially the one about the "optionality" in the Taylor Rule. (If I may say so, at my own expense, you have underpriced your blog!). Another thing, if I may, about the Taylor Rule. Unemployment can go up, say from 3.5% to 4.5%, in three ways. 1) Layoffs 2) Improved participation rate 3) Mix of (1) and (2). If you set aside the inflation segment of the Rule for the moment, it would recommend only one course of action for all. But the underlying economy is different in each scenario. An economy where unemployment is up due to mass layoffs is different from one in which unemployment is up because people are drawn into the labor force when jobs become easier to find. They are counted as unemployed during search.
Who, except Taylor, thinks the Taylor rule is optimal? (And the Fed's mandate does not say minimize unemployment, but pot maximize employment, anyway.) The mandate ought to be understood as requiring the Fed to shoot for maintaining an optimum rate of inflation that maximizes discounted real income, taking into account the costs of inflation that is both too high and too low, costs that arise from upward and downward rigidities in relative prices and the time required for market participants to approximate quasi-equilibrating relative prices. The mandate is really silent about how quickly the Fed should attempt to return inflation to the (optimum) target. That would depend on the costs of over or under target inflation and the risks of overshooting in the opposite direction.