This was another week with a lot of commentary on the Taylor Rule, and I am grateful to Jon Hilsenrath of the Wall Street Journal for suggesting an interview with me on the subject and posting it on Wednesday. He raises many good questions.
A few days earlier Paul Krugman wrote a piece using an estimated version of the Taylor rule rather than the actual normative rule I proposed back in 1992. He was trying to make the case that the Fed should keep the interest rate at zero for two more years. As explained in this Bloomberg News op-ed piece, I disagree with using estimated policy rules this way because it causes past mistakes to be repeated.
On Tuesday David Altig used another estimated policy rule. He was writing about the causes of the financial crisis. He used an estimated policy rule to argue that the very low interest rate set by the Fed in 2002-2005 was not an inappropriate deviation from a policy that worked well in the 1980s and 1990s, contrary to what I and others have argued. But his estimated version of the Taylor Rule uses the most recent federal funds rate (no matter what it is) to determine what the current federal funds rate should be at each Fed meeting. Such an approach is circular, assuming in essence that the Fed follows itself, which makes it difficult evaluate when policy is good and when it is not. Yesterday David Beckworth wrote an article explaining clearly the problem with such an approach.
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