Friday, November 7, 2008

Would the Taylor Rule Have Been a Better Guide than Discretion?

Below is a graph from Cecchetti's Money, Banking and Financial Markets textbook. It begs the question: what would have happened if the Fed would have followed a simple Taylor rule instead of an overly discretionary policy since 2002? Was the Taylor rule pointing in the right direction all this time?
PS: Hamilton wrote this post on the subject on September 2007.

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