Remarks on Monetary Policy Challenges

John Taylor

No 12-032, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: This paper shows that deviations from more rules-based policies that worked well in the Great Moderation or NICE (Non-Inflationary Consistently Expansionary) period have been a factor in the deterioration of economic performance in recent years. The policy deviations explain why the volatility of output increased and took the economy to an inefficient point off the tradeoff curve between output variance and inflation variance. This finding is in contrast to the view put forth by Mervyn King (2012) that the tradeoff curve itself shifted. The finding suggests that the most important challenges for monetary policy in the future are to return to a more predictable strategy for the instruments of policy and to hold to that strategy as closely as possible.

Date: 2013-03
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