Economy Matters

Thirty years since the publication of the Taylor rule, John B. Taylor still owns a prime spot in the town square of economic discussions.

The Federal Reserve Bank of Atlanta helps keep the Taylor rule in the public arena. The Bank's website features the Taylor Rule Utility, an interactive tool that generates federal funds rate prescriptions based on inputs into a generalization of Taylor's original formula, which remains a standard in the rules-versus-discretion debate about the approach central banks use to set and adjust monetary policy.

The rule is a well-viewed destination on the Atlanta Fed's web page for the Center for Quantitative Economic Research. In May, Taylor served on a panel at the Atlanta Fed's Financial Markets Conference, presenting "How to Conduct Monetary Policy amid Higher Inflation and a Nonbinding Zero (Effective) Lower Bound?" in a policy session.

Taylor, 76, holds forth these days from Stanford University, his academic home since 1984, and the Hoover Institution, a perch since 2007. In addition to an appearance in March before the House Budget Committee, Taylor is a steady presence on Bloomberg, CNBC, and Fox. Taylor's website shows his remarks this year have been broadcast by international entities including Korea Business News and the Institute of International and European Affairs, an Irish policy think tank.

Taylor remains a sought-after observer in part because of his longevity with, and insights into, issues at the core of the nation's political discourse: federal spending, Federal Reserve monetary policies, and the debt ceiling.

One example of his reach dates to the debt ceiling crisis of 2011. During those debates, Taylor released an essay that elaborated on the call for a deal that would tie a hike in the debt ceiling to spending cuts. The House Republican leadership embraced the strategy. One of those leaders was current House Speaker Kevin McCarthy, who followed a similar playbook in this year's debt-ceiling negotiations.

Taylor has also helped guide the education of many economists, and with that contributed to their philosophical underpinnings about the economy. He taught economics at Columbia University from 1973 to 1980, at Yale University in 1980, and at Princeton University from 1980 to 1984 before returning to Stanford. Taylor earned his PhD in economics from Stanford in 1973.

New York Fed president John C. Williams was a Taylor mentee. Taylor served as principal adviser on Williams's 1994 dissertation, "Tax and Technology Policy in an Endogenous Growth Model." Williams served as president of the San Francisco Fed before moving to the New York Fed, unique among the 12 district banks because it implements monetary policy set by the Federal Open Market Committee and has duties beyond the scope of the other 11 Reserve Banks.

Taylor's public service culminated at the Treasury Department in the four years following the terrorist attacks of September 11, 2001. Taylor was on a mission in Tokyo when the attacks occurred, having been sworn into office May 27, 2001, as undersecretary for international affairs. In his prepared statement to the Senate during his confirmation hearing, Taylor said he looked forward to advancing the "ambitious economic agenda" of President George W. Bush. He spent the next four years fostering and implementing the effort to cut off funding sources to al-Qaeda organizations and retool significant pieces of the world's financial structure.

Taylor recounts his work at Treasury in his 2007 book, Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World. Taylor takes readers around the world as he and other emissaries worked to rebuild the economies of Afghanistan and Iraq, establish new rules for the International Monetary Fund, avoid global financial contagion, and negotiate the cancellation of about $100 billion in Iraqi debt incurred by former dictator Saddam Hussein, an effort intended to help Iraq recover from financial woes inflicted by Hussein's rule.

The epilogue of Global Financial Warriors describes how Taylor came to his position in the Treasury. Taylor met Bush in 1998 at the home of the late George P. Schultz, who lived across from Taylor on Stanford's campus and to whom Taylor dedicated the book. Schultz was a Stanford economist and former US secretary of state who also held a position at the Hoover Institution. Also present was Condoleezza Rice, who served during the George W. Bush administration as secretary of state and now directs the Hoover Institution. These three devoted two years to Bush's 2000 presidential campaign, and Taylor and Rice joined the Bush administration.

Taylor rose again on the national stage in 2017 when he was considered for chair of the Federal Reserve System. Taylor made the short list of candidates, according to multiple news reports, but was passed over in part because he viewed the existing interest rate as too low, according to observations including this one by John Hopkins University economist Alessandro Rebucci.

The passing years haven't muted Taylor's campaign for the Federal Reserve System to adopt a rules-based approach to monetary policy. A review of Taylor's writings shows:

• In 1993, in his seminal paper, "Discretion versus Policy Rules in Practice," Taylor wrote: "If there is anything about which modern macroeconomics is clear however—and on which there is substantial consensus—it is that policy rules have major advantages over discretion in improving economic performance."
• In 2023, Taylor coedited a book, How Monetary Policy Got Behind the Curve – and How to Get Back, that also included his 2022 essay, "It's Time to Get Back to Rules-Based Monetary Policy." In the essay, Taylor observed that "this review sets the stage and suggests a way for the Federal Reserve to improve economic performance and achieve low inflation by getting back to more rules-based policy decisions."

David Pendered

Staff writer for Economy Matters