Wednesday, January 19, 2011

A Law Might Speed Up the Taylor Cycle

The phrase in the headline above concludes Amity Shlaes's "amazingly thorough" article (quoting AEA President Orley Ashenfelter here) on the long cyclical swings between rules and discretion which I documented in a speech at the annual AEA-AFA luncheon in Denver on January 7. Given that the previous period of discretion (in the 1960s and 1970s) lasted nearly two decades, a continuation of the normal cycle means that it might take another dozen years to get back to more stable rules-based monetary and fiscal policies, which is the length of time Amity Shlaes suggests. She also suggests that a law could move the balance back toward rules much sooner. I think that’s why we are beginning to see renewed interest in legislation to modify the Federal Reserve’s mandate and add reporting requirements and accountability for its monetary strategy.

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