John Taylor on monetary stimulus when Reagan was president

Here is John Taylor discussing a paper by Martin Feldstein and James Stock:

NGDP and RGDP growth certainly did speed up after the 1982 recession, and Taylor’s right that this probably explains the faster recovery in the US as compared to Europe (although supply-side factors also played a role.)  In the first six quarters of the 1983 recovery NGDP growth averaged 11% and RGDP growth averaged 7.7%.  Taylor’s right that if you don’t have robust NGDP growth, you won’t get a satisfactory recovery.  For instance, NGDP growth has averaged just over 4% in the current “recovery,” which doesn’t even keep up with trend.

Taylor’s also right that level targeting is the way to go, and you want a policy that addresses both inflation and real growth.  Again, we can see the folly of growth rate targeting in this recovery.  Inflation has only averaged a bit over 1% during the past three years and yet the Fed doesn’t seem to be trying to catch-up for the shortfall.  Nor is the Fed taking real growth into account, even with a pure inflation target you could justify additional monetary stimulus.

And yet despite all this, some economists now insist that Fed policy is too expansionary, that the Fed should ignore its dual mandate and tighten monetary policy despite low inflation and 9% unemployment.

For instance, John Taylor.

HT:  Dilip



36 Responses to “John Taylor on monetary stimulus when Reagan was president”

  1. Gravatar of Steve Roth Steve Roth
    19. September 2011 at 07:30

    Sort of out of the blue, but something I’ve often wondered, and have often wondered what you’d think about it:

    What if the Fed targeted some definition of velocity (GDP/M2 for instance), seeking to keep it stable in the way Friedman wanted monetary growth held stable?

    I’m thinking you’ve probably addressed this, but didn’t turn it up on a quick search.

    P.S. It would be great if there was a comments feed for each post here… Thx.

  2. Gravatar of Richard A. Richard A.
    19. September 2011 at 07:43

    Maybe Taylor is too much of a Republican.

  3. Gravatar of marcus nunes marcus nunes
    19. September 2011 at 07:53

    The “Taylor Principle” is now only concerned with “Price Stability”, placing a zero coefficient on the “output gap”!

  4. Gravatar of Benjamin Cole Benjamin Cole
    19. September 2011 at 08:05

    John Taylor authored a paper, in 2006, in which he positively gushed about the great benefits of a then recently conducted QE program in Japan. The paper is on his website.

    Now, in similar circumstances, he says QE is bad for the USA.

    Politics trumps all.

  5. Gravatar of marcus nunes marcus nunes
    19. September 2011 at 08:08

    When Reagan was president NGDP targeting was all over…This from the St Louis Fed in 1988:

    It is my contention that putting a GNP target up front for the Federal Open Market Committee to aim at would allow it to mobilize its staff to design the best way to keep monetary growth and GNP growth down when such a course is obviously right as it was in the late 1970s.There is doubtlessly an element of discretionary fine-tuning in c;NP targeting, but with a twist. Deviations from the target nominal GNP path should induce Federal Reserve actions to move monetary growth up or down in order in order to bring forecast GNP growth back to a long-run non-inflationary path. Perhaps there should be some limit on how much change in targeted GNP to be permitted in a particular period. In any case, to avoid getting off track as in the 1970s, the Federal Reserve has to direct its considerable powers toward controlling inflation
    trends by actions that push monetary growth in the right direction when nominal GNP’ growth is off target.

  6. Gravatar of Scott Sumner Scott Sumner
    19. September 2011 at 08:24

    Steve, The Fed can’t really control velocity.

    What’s a comment feed?

    Richard. It sort of looks that way. I’d be interested in hearing from him why he changed his views.

    Marcus, That’s right.

    Ben, Good point.

    Marcus, Yes, traditionally NGDP targeting has been associated with conservatives.

  7. Gravatar of Steve Roth Steve Roth
    19. September 2011 at 09:34

    >What’s a comment feed?

    An RSS feed just of the comments on a post. Can click to subscribe and see in your reader when new comments come in. Probably a WordPress plug-in or widget would provide it.



  8. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2011 at 10:25

    Richard A.


    C’mon man, monetary policy, like government itself, OUTWEIGHS the opinion of Republicans.

    They OWN the stuff, remember?

    Democracy isn’t for sure. Capitalism is.

  9. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2011 at 10:27

    OUTWEIGHS is the wrong all caps word.

    use instead FOLLOWS

  10. Gravatar of Scott Sumner Scott Sumner
    19. September 2011 at 10:46

    Thanks Steve, I’ll look into it.

  11. Gravatar of Eric Morey Eric Morey
    19. September 2011 at 11:25


    There is a separate feed of comments provided for each post already. There is a link at the bottom of each post in a shaded box with the text “You can follow any responses to this entry through the RSS 2.0 feed.” (“RSS 2.0” is hyperlinked to the feed address).

    Many sites also have a feed of all comments. I’m assuming that wordpress has this capability since there is a “Recent Comments” list on every page of the site. It would be nice to have a feed of all comments too.

    Scott, maybe you could look into making a feed of all comments instead, since a new feed for each post’s comments is already automatically generated and available?

  12. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2011 at 11:36

    I think Scott out to use Facebook or Disqus for comments.

    Nesting adds real value, so does email notification.

  13. Gravatar of jj jj
    19. September 2011 at 11:48

    In August 2007, the TIPS market forecast of CPI was 2.15%. (1)
    Actual CPI since August 2007 has been 2.17%. (2)

    How can you say the Fed hasn’t been doing a phenomenal job of managing inflation over the past 4 years?


  14. Gravatar of jj jj
    19. September 2011 at 12:20

    (btw I’m playing devil’s advocate; I could take a few stabs at an answer, but I’d like to hear yours)

  15. Gravatar of Eric Morey Eric Morey
    19. September 2011 at 12:49

    “Nesting adds real value, so does email notification.”

    I’ve seen both of these handled with wordpress better than Facebook or Disqus. I’ve also seen them handled worse. I’d be supprized if it wasn’t really simple to add nesting to comments in wordpress. I bet email subscriptions would be more difficult (though I’m not sure why a RSS reader wouldn’t suffice for someone that wants email notifications.) I guess is is up to the blog owner to decide which is the “best” way to go.

  16. Gravatar of Dustin Dustin
    19. September 2011 at 13:46

    It would be nice to get a feed for ‘all comments’ instead of just post-specific ones.

    I have Woolsey’s site, Uneasy money, and Beckworth’s site set up in my RSS reader so I can read both posts and ‘all comments’.

  17. Gravatar of flow5 flow5
    19. September 2011 at 13:49

    “In the first six quarters of the 1983 recovery NGDP growth averaged 11% and RGDP growth averaged 7.7%”

    I checked the evidence – money flows (MVt). Real-gDp has always initially increased at a faster clip coming out of all recessions (however inflation does later catch up, sometimes with a vengence). Thus targeting ngDp rules.

    Money velocity is controlable. But even if it wasn’t, you can change our regulations to make it simple to control, i.e., eliminate some of the financial innovations resposible for money’s hyper-activity.

    Taylor doesn’t know anything about the 82 recession.

  18. Gravatar of John John
    19. September 2011 at 14:00


    Where are you getting the idea that inflation is low? I’m getting my idea that it is high from the Bureau of Labor Statistics website which I’ll produce again:

    “The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.8 percent before seasonal adjustment.”

    I’ll bet that my source is better than your source. Maybe your not interested in quoting a source?

  19. Gravatar of PJ PJ
    19. September 2011 at 14:05


    Good point. But in August 2008 the TIPS based measure of inflation expectations was 2.3% and average inflation since then has been 1.1%. Meanwhile, unemployment has averaged 9% over the same period.

  20. Gravatar of cassander cassander
    19. September 2011 at 14:11

    Scott, you still haven’t articulated a theory of how we are supposed to know when the problem is too little NGDP growth and when the problem is on the supply side. You really should do a post about market monetarism and the 70s.

  21. Gravatar of flow5 flow5
    19. September 2011 at 14:39

    The inflationary impact of money flows is not revealed by either the producer or consumer price indexes. They don’t reflect the DIS-INFLATION that has taken place in real estate.

  22. Gravatar of Robe Robe
    19. September 2011 at 16:37

    Here is a paper on NGDP targeting by John Taylor from the 1980s:

    Although he discusses some of the difficulties with NGDP targeting he concludes by suggesting that he supports NGDP focused policy from the Fed. I think what Taylor objects to about QE2 is that the actions are discretionary and thus may increase the level of uncertainty about future economic conditions. He may very well support an NGDP target founded on a rules-based, non-discretionary principle.

  23. Gravatar of Michael Rume Michael Rume
    19. September 2011 at 17:29


    What would be the downside of the Fed simply crediting China’s accounts tomorrow morning with the 1.2 trillion it owes? Or all countries with the amounts they are owed in principal?

    Would it cause an inflationary spiral?

  24. Gravatar of Jim Glass Jim Glass
    19. September 2011 at 18:44

    Aw, this is all getting so complicated and frustrating.

    Taylor’s proposal to just get rid of the dual mandate and have the Fed deal only with price stability may finally start looking good as the happy simplifying solution.

    “Hey, see great job we’ve done, how much we’ve *improved* things since 2008. Everybody, be happy!”

    Much like the McGovern solution to the Viet Nam war: “We won!”

  25. Gravatar of Scott Sumner Scott Sumner
    19. September 2011 at 18:53

    Thanks Eric and Dustin.

    Morgan, Would that cause you to leave even more comments?

    jj, You said;

    “How can you say the Fed hasn’t been doing a phenomenal job of managing inflation over the past 4 years?”

    I didn’t say that, I said the past three years.

    And I’d add that “managing inflation” is not the Fed’s job, they have a dual mandate.

    flow5, Friedman, Taylor, it’s amazing how many people don’t know anything.

    John, I’m using the same site, CPI inflation has averaged about 1% per year over the past three years, lowest rate since I was a little kid.

    PJ, And the Fed’s big mistake was letting TIPS spreads plunge after August 2008.

    cassander, The Fed should target stable NGDP growth regardless of whether we have supply-side problems or not. In the 1970s (1972-81) NGDP growth averaged about 11%. There’s your inflation problem. BTW, real growth in the 1970s wasn’t abnormal–so the idea of supply-side problems during that decade is greatly exaggerated. There were some, but not that bad.

    Robe, This is what puzzles me. If you support NGDP targeting you should be screaming out for easier money. Of course the Fed doesn’t have an automatic rule right now, but that doesn’t mean one shouldn’t give good advice based on whatever they are trying to achieve, as well as the current position of the economy. And we’ve had 4% NGDP growth over three years, versus a normal 15%.

    Michael, I’m a bit puzzled by your comment. If the Fed bought all that debt from the Chinese, presumably they’d simply take the money and buy more debt from someone else. So it doesn’t matter who they buy it from. That much OMPs would probably be mildly expansionary, a bit more than QE2.

  26. Gravatar of Michael Michael
    19. September 2011 at 19:46


    With respect to my comment about the debt: I was not trying to be a smart alec. I am simply curious what the terrible downside would be if we decided, tomorrow, to print up all the money we owe to foreign countries and pay the principal off that way, wiping things back to zero. We have the ability to do that–the debt is in dollars. Is it because of inflation worries? If so, wouldn’t the onus then shift to the paid-off countries to keep that money out of circulation?

  27. Gravatar of Robe Robe
    20. September 2011 at 02:04

    I’m not saying I agree with Taylor. On my blog I’ve stated that I agree with you on this and just about everything else many times. I’m just saying I can see the rationale behind his thinking.

    As an analogy, one might not support a temporary tax cut because even economic agents with limited foresight would be unlikely to change their behavior because of the very temporary nature of the tax cut. That doesn’t necessarily mean you wouldn’t support a permanent tax cut.

    This situation is a tad different but would go something like, without rules based monetary policy even agents with limited foresight perceive that the level of uncertainty in the economy has increased. However, with a rules based approach they will know the goal of the policy and it would not add to the level of uncertainty.

    Again, this is not my view. It’s just I consider Taylor a brilliant economist, so I think its worth trying to understand his argument as best as possible. Also, I should note I can’t be sure this is his argument. This is just what I think his argument might be.

  28. Gravatar of Scott Sumner Scott Sumner
    20. September 2011 at 08:12

    Michael, Yes, I think the fear is inflation, and I don’t think that fear would cause foreign counties to hold on to lots of currency. They’d swap it for interest earning assets.

    Right now the Fed isn’t printing currency, they are creating interest bearing reserves. In that case it’s not clear we’d profit from swapping reserves for low interest T-debt.

    Robe, I agree he’s a brilliant economist, but let me restate my confusion. The Fed isn’t following any sort of rule right now. And if they follow Taylor’s advice they still won’t be fallowing any sort of rule. So it’s not a question of rules versus discretion, it’s a question of good policies under discretion vs. bad policies under discretion. Taylor favors NGDP targeting. If you had a rule doing that then the Fed would now need a more expansionary policy. Yet Taylor calls for tighter money even though:

    1. It won’t mean we have a rule.
    2. It will put us further away from his goal of stable NGDP growth.

  29. Gravatar of Scott Sumner Scott Sumner
    20. September 2011 at 08:15

    Robe, I should amend my previous answer. He has historical favored something closer to NGDP targeting. Let’s say he now favors a 2% inflation target. Based on TIPS spreads that would also call for easier money right now.

    If he now wants the Fed to cut it’s inflation target to a lower number, he needs to explain why disinflation is a good policy to pursue in the midst of the biggest debt crisis in world history.

  30. Gravatar of MikeDC MikeDC
    22. September 2011 at 07:26

    I just re-read Taylor’s piece, and I don’t think he’s arguing for a cut in inflation.

    He’s saying the ill-advised fixation with lowering interest rates is aimed at raising employment.

    Not only does this not work, it causes the Fed to ignore price stability and allow deflation. Which, of course, kills employment.

    By abandoning the employment goal, the Fed gets to stop caring about interest rates and focus on the price level. Which will help the now unstated employment goal.

    It’s elegant, ingenious, and it might actually be right.

  31. Gravatar of johnleemk johnleemk
    22. September 2011 at 07:36


    That’s what I thought when I read the piece too. But I don’t know what evidence there is that Taylor has such an ingenious and devious plan. He expressed a fair amount of concern about inflation when deflation is the threat. He’s either playing a very clever game to pull the wool over the deflationists’ eyes, or he really does think the Fed should continually intervene to suppress economic growth.

  32. Gravatar of Eric Morey Eric Morey
    24. September 2011 at 09:57


    It seems that WordPress automatically creates an RSS feed of all comments for each WordPress site. The address for The Money Illusion is below. If you create a link to this address in the sidebar or at the top of the site, people interested will be able to find it.

  33. Gravatar of Eric Morey Eric Morey
    24. September 2011 at 10:17


    Instructions on how to change the comment settings in wordpress to allow threading (nesting):

    or for the more advanced:

  34. Gravatar of Eric Morey Eric Morey
    24. September 2011 at 10:26


    Instructions on how to allow readers to subscribe to email notifications (full text or abridged) of new posts and new comments (all comments or comments on single posts):


    I hope all of this helps you and your readers.

  35. Gravatar of Scott Sumner Scott Sumner
    26. September 2011 at 11:41

    MikeDC, I’ll take a look, but didn’t he also oppose QE2, because it was expansionary? I’ve seen him make many comments opposing expansionary policies

    Thanks Eric, I just added one link to the right side, for the RSS comments feed. I will do the comment nesting soon. I’m still struggling to catch-up.

  36. Gravatar of Eric Morey Eric Morey
    26. September 2011 at 13:14

    “I just added one link to the right side, for the RSS comments feed. I will do the comment nesting soon. I’m still struggling to catch-up.”

    Awesome! The link’s placement is odd. But as long as it is available people will find it. Or you can remind people where it is when asked.

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