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Taylor Rule

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I need help figuring out the taylor rule. If GDP is subpar, and inflation is zero, taylor says the solution is a lower interest rate. What if the economic problems are because of an inefficient and expensive health care system, too high corporate tax rates, or overly complex regulations? The taylor rule seems to say forget any real problems, and instead lower the interest rate. Also, the fed really can’t improve the economy directly, they operate through the banking system, and financial markets only, so maybe the fed can enrich financial institutions with enough corporate welfare that it somehow trickles down onto everyone else. This taylor rule seems so insanely stupid that nobody could possibly buy into it. Enough incredibly smart people believe in the taylor rule, so it must be valid. What am I missing?

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Posted by laskerfan12
Posted on 03/19/2017 6:22 PM
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In 2015, financial manager Bill Gross said the Taylor rule “must now be discarded into the trash bin of history”, in light of tepid GDP growth in the years after 2009. Gross believed low-interest rates were not the cure for decreased growth, but the source of the problem. http://www.cnbc.com/2015/07/30/gross-low-rates-are-the-problem-not-the-solution.html

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Posted by Dennis
Answered on 03/19/2017 6:55 PM
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    In 2015, financial manager Bill Gross said the Taylor rule “must now be discarded into the trash bin of history”, in light of tepid GDP growth in the years after 2009. Gross believed low-interest rates were not the cure for decreased growth, but the source of the problem. http://www.cnbc.com/2015/07/30/gross-low-rates-are-the-problem-not-the-solution.html

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    Posted by Dennis
    Answered on 03/19/2017 6:55 PM
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      I also believe in the corollary, raising the interest rates too high causes inflation due to the marketing of high-interest rate loans and teaser rates etc. used by loan originators to increase the market penetration of these products.

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      Posted by Dennis
      Answered on 03/19/2017 6:58 PM
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        I’ve never understood why anyone takes ideas like this seriously. In fact, if more economists understood banking I doubt they would. The Taylor Rule is based largely on the erroneous idea that we can know the Natural Rate of Interest. This is the theoretical interest rate at which the economy operates with full employment and stable inflation. This would be the short term cost of money that leads every market to basically clear.

        But this is literally impossible. In addition to there being millions of different interest rates, there is no possible way for the Fed to control the cost of interest rates in such a way that it would lead to full employment. For instance, when the Fed cuts short term rates there is no law by which banks must then reduce the cost of their loans. In other words, there is no direct connection between the money the Fed controls (reserves) and the money that the real economy operates with (bank deposits).

        This is nonsensical economic theory implemented by people who either have way too much time on their hands creating theories or have no banking and real economic experience. My guess is it’s a bit of both.

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        Cullen Roche Posted by Cullen Roche
        Answered on 03/20/2017 5:15 PM
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          The Modified Taylor Rule is useful only for the monetary policy sandbox (FFR). Nothing else. The Fed is typically behind the curve.

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          Posted by MachineGhost
          Answered on 03/28/2017 11:21 PM
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