Tercer post resumen del Cato Monetary Conference en Sound Money Project.
In this post I want to briefly comment on three points raised by J. B. Taylor, George Selgin, and Scott Sumner. Though these points have been raised before in the literature, they are certainly worth reviewing.
J. 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 decision, of a major central bank affects the decision making of other major central banks. This could result in unintended loose policies 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 expanded the monetary supply. In response, a major trade partner like China might have decided to peg its exchange rate to the U.S. dollar in order to avoid the effects on its trade with the U.S. To do this, China would have to mimic the Fed’s policy. The international effects of the Fed’s policies are certainly significant. It is worth noting that 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 that 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.