John Taylor of Stanford was a guest on Econtalk. Unique among most economists, Taylor has a widely-known rule named for him. The Taylor rule provides guidelines on how to handle inflation. He developed the rule in the midst of the Stagflation of the late 70s and early 80s. Basically, Taylor proposes that the federal funds rate - which is set by the Federal Reserve - should rise with inflation (that is a gross simplification for which I apologize). Oftentimes, there is guesswork to try to keep the rate low enough to encourage borrowing - which provides capital for investments - and high enough to tame inflation. Taylor holds that the Fed has done an excellent job with the interest rate for most of the last 40 years. However, the current rate of near 0% is entirely out of step with the inflation rate.
Much of the discussion is just a primer on what is inflation, how do you measure inflation (consumer price index), what are the causes of inflation, what are ways of countering inflation, and what are the consequences of not countering inflation. Runaway inflation leads to barter economies. Taylor was conservative on his estimates of the inflation rate and proposed that the Federal Reserve should be raising the nominal interest rate to fight inflation. He proposed that they should have taken action in summer of 2020. Russ asked about fiscal policy, but Taylor did not delve into that subject beyond saying that big deficits are not ideal. It is better to have smaller deficits. Way to take a stand. He is a monetary economist and more interested in interest rates.
It reminds me of lectures from college. Recommended.
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