SMP: More Insights from the Cato Monetary Conference

In this post I would like to briefly comment on three points raised by J. B. Taylor, George Selgin, and Scott Sumner. Though these points have been raised before, they are worth reviewing.

  1. B. Taylor delivered his lecture on the challenges of monetary policy in an international context. The first challenge, of course, is that the strategy, or policy decisions, of a major central bank affects the decision making of other major central banks. This could result in an unintended loose policy at the international level as central banks around the world react to an expansionary policy by a major central bank, like the Federal Reserve. Say, for instance, that after 2001 the Fed would have decided to reduce the federal funds rate target and expand monetary supply. Because of these, a major trade partner, say China, decides to peg it exchange rate with the U.S. dollar to avoid the effects on its trade with the U.S. To do this, China needs to mimic the Fed’s policy. The international effects of Fed’s policy are certainly significant. The two largest crises in Latin America happened after the two largest deviations by the Fed from Taylor’s rule (here). But to be conscious of these issues does not mean the solution is easy. Leith and Wren-Lewin (2009) show that when assuming open economies, the Taylor rule may be indeterminate or produce spill over to other economies.

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