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Unemployment Was Lower When Fed Stuck to Taylor Rule

(p. A17) . . . in a recent empirical study, Alex Nikolsko-Rzhevskyy of Lehigh University and David Papell and Ruxandra Prodan of the University of Houston divided U.S. history into periods, like the 1980s and '90s, where Fed policy basically adhered to the Taylor rule and periods, like the past dozen years, where it did not. Unemployment was 1.4 percentage points lower on average in the Taylor rule periods, and it reached devastating highs of 10% or more in the non-Taylor rule periods.

. . .

Moreover, Fed calculations that only look at macroeconomic effects of low rates overlook their negative microeconomic effects on bank lending found by economists Charles Calomiris of Columbia University and David Malpass of Encima Global.

For the full commentary, see:

JOHN B. TAYLOR. "The Case for a Rules-Based Fed; Neel Kashkari is wrong. My proposed rules-based reform of the Fed would not be run by a computer." The Wall Street Journal (Weds., Dec. 21, 2016): A17.

(Note: ellipses added.)

(Note: the online version of the commentary has the date Dec. 20, 2016.)

The paper mentioned above, that shows the good results when the Fed followed policies close to the Taylor rule, is:

Nikolsko-Rzhevskyy, Alex, David H. Papell, and Ruxandra Prodan. "Deviations from Rules-Based Policy and Their Effects." Journal of Economic Dynamics and Control 49 (Dec. 2014): 4-17.

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