Time For A Taylor Rule

Alan Greenspan admits that the Federal Reserve isn’t really independent from government.  One of the best ways of reducing inflation—and public expectations of inflation—is to have an independent central bank staffed by “conservative” bankers (not conservative as in ideology, but rather those who despise inflation).  Another way of reducing inflation is to give this central bank one specific goal:  to keep inflation at a certain level, generally in the neighborhood of 2%.  To do this, central banks would follow a Taylor Rule.

During Alan Greenspan’s tenure at the Federal Reserve, Ben Bernanke noted that Greenspan followed implicitly a Taylor rule even though his external pronouncements indicated that he was flying by the seat of his pants, and Bernanke argued that Greenspan would actually be better off adopting an explicit Taylor Rule as countries like New Zealand had done.  Following an explicit Taylor Rule would help to force central bank independence from governmental policy, but I can’t see one being adopted at this time because the federal government wants to continue expanding monetary supply, and Bernanke has been working closely with the federal government, thereby destroying further the (mostly-theoretical) gap between the Federal Reserve and the United States government.  Thus, continue revising inflation expectations upward in 3, 2, 1…

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