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Hello and welcome to another episode of the Authoughts podcast. I'm Tracy Alloway.
And I'm Joe. Why isn't thal Joe?
We're back in Jackson Hall.
Jackson Hall. I love it here.
It's beautiful. It's beautiful, And not only do we get a chance to enjoy the gorgeous scenery, we get a chance to talk economic policy.
There's so much going on right now. To see the least, we don't need to recapituate. Everyone knows what's going on right now. There's so much stuff, whether we're talking about macro situation, whether we're talking about whatever.
I love how you say there's no need to recapitulate and then you immediately do it.
Well, there's just so much going on.
I think you're hitting on like a couple things. Which is there are these different themes floating through the conference, So obviously you have uncertainty over what tariffs actually do to the economy, like what type of shock are they? Do they destroy demand and therefore maybe cause deflation, or do they lead to companies passing on those costs and cause inflation. There's central bank independence, which everyone wants to
talk about. And there's obviously the direction of short term interest rates.
And then of course the formal and then of course the formal theme of the conference about labor, labor markets and all this stuff. So yes, many different things.
Going on, all right, Well, I am very pleased to say that there is in fact one paper that ties basically all these themes together. So we have the author here and really the perfect guest to Jehan.
We've wanted to talk to for a long time.
Absolutely, we're going to be speaking with Emmy Nakamura, a professor at Berkeley and the author of a paper being presented at Jackson Hole called Beyond the Tailor Rule. So, Emmy, thank you so much for coming on all lots, it's great to be here. Let's just start what is the.
Tailor rule before we can go beyond it?
Yeah, yeah, Well, in nineteen ninety three, John Taylor wrote a paper in which he showed that the behavior of the Federal Reserve could be described by this remarkably simple rule as a function of inflation and what people call the output gap, which is sort of a measure of
how overheated the economy is. And this was very surprising to people because people typically think of what the Federal Reserve and other central banks do as incredibly complicated, and so the surprise was that you could actually describe it by something very simple. And since that time, when John Taylor wrote his original paper in nineteen ninety three, the tailor rule has achieved more or less mythical status within
economics and the policymaking world. The original paper was mostly descriptive. Like I said, it was pointing out that the behavior of the Fed, which seemed complicated, could actually be described by something really simple. But since then it's really become a guide for prescriptive monetary policy. And when central banks deviate from the tailor rule, they're often asked to explain why this was a major theme in the post COVID inflation for example.
So on that note, could I ask why the tale rules specifically and talk to us maybe about the process of how these papers come into being a head of Jackson hole.
Why we wrote about the tailor rule. Well, as I said, the tailor rule has achieved this incredibly dominant status within not only the academic literature and monetari policy, but also within the policy community. And yet when I teach students, one of the things that's somewhat uncomfortable is that the tailor rule doesn't fit all that well over the past
twenty years. So it fit pretty well during the Greenspan period and all the way until about two thousand and eight in the United States, but it hasn't fit very well since then. First of all, there was the zero lower bound period when interest rates were just at zero, but it also didn't predict very well either the timing or the magnitude of lift off from zero interest rates. So given that twenty years is starting to be a long time, the question is should we still view this
as the benchmark for describing monetari policy. And then there's this second question about how to think about Goodmane type policy. So when John Taylor wrote his original paper, you know, it was mostly descriptive paper, but he did point out that this was a time period. The time period he said was actually only six years. It was from nineteen eighty seven to nineteen ninety two, But he pointed out that this was a time period a lot of people
thought of as representing good monetary policy. So while the paper was mostly descriptive, he did say, you know, well, maybe this is a guiy to good mone type policy too, And that's a theme that a lot of people have picked up on since then, and we thought it was important to sort of reinvestigate that theme.
But this is funny, right, like, because there is this tension of whether it's a descriptive or prescriptive thing. And I've heard for years people on TV it's like, oh, Taylor Roll says it should be a lot higher, or the tailor it should be lower. Whatever.
We just heard it from Jeff Schmidt the Kansas Fed, right.
And yet this is all based on basically a sort of backing out description of five years of monetary policy that six years, six years? Okay, sorry, six year maybe not quite So can you talk a little bit more about though this. I don't know if it's a debate or like, how people think about prescriptive versus descriptive within this role.
So the tension that you're describing is exactly what motivated us to write this paper, because it's interesting how a framework like this, which is so simple and so powerful in terms of describing monetary policy and does say some things that are very true about what MONTEI policy should do in terms of leaning against inflation, leaning against an overheating. Overheating economy can end up becoming maybe more than even
the author intended as a prescriptive rule. And one of the things that we want to remind people of is the historical context for when John Taylor's paper was written. So it was written in nineteen ninety three. This was a period when the FED was coming off some very difficult years for monetoi policy. So the nineteen seventies and nineteen eighties were very difficult years for monte policy. Inflation had been very high in the late nineteen seventies and
early nineteen eighties. The Fed's reputation was, to say the least limited as an inflation fighter. Inflation expectations were not nearly as anchored as they are today. So it was a very different time, and I think some of the context for John Taylor's paper is saying that when you have those kinds of reputational challenges, sometimes you kind of need to tie yourself to a mask and say we are not going to.
Go to a mathematical rule exactly.
Because the nineteen seventies are also one of the time periods in history which is best known for political pressure on the FED, and so in the context of that kind of political pressure, one of the things you want to think about doing is giving people a very simple, observable metric for how you adjust interest rates. But then, of course, by you know, several decades later, the Fed's
reputation had changed pretty dramatically. We had seen decades of low and stable inflation, and you know, the FED and other central banks around the world had really developed a very strong inflation fighting reputation. So then the question arises, is the same kind of tying your hands approach appropriate even in the context of you know, shocks like what we saw after COVID. And so this is the sense in which I think, you know, this is a time at which we want to ask these questions.
It reminds me very much of the Psalm rule and the arguments there that if you find like a specific number, the ideas that you use a sort of simple formula and then you immediately jump into action. So on that note, one of the key things about the tailor rule is that it suggests rates need to rise by more than one for one with inflation to properly offset inflation, like you have to go in very very strong. But you found in your paper that that's not always the case exactly.
So even beyond the idea that you want to raise interest rates more than one for one, so it's the coevision's one point five in the tailor rule. But there's the idea even beyond that of the tailor principle, which is exactly what you described, that you want to not only raise interest rates nominal interest rates with inflation, but
you want to raise real interest rates. And if you want to raise real interest rates, then you have to is nominal interest rates more than one for one, exactly what you said, and so that's kind of a core idea and it's one of the main reasons why the gap between the tailor rule prescription and what central banks
actually did during the COVID inflation was so large. And actually for the United States this gap was about it was over ten percentage points, so we are talking about a very large gap and the COVID inflation saw the largest gap in history. So why does that not actually happen always in monetary theory, Well, the reason is because there are different sources of inflation. So the motivation for leading hard against inflation that is probably pretty intuitive to
most people is demand driven inflation. So when inflation is coming from an overheating economy, then there's this notion in monetary economics that you can satisfy all objectives of both kind of calming down the economy but also keeping inflation in check by raising interest rates pretty aggressively and actually optal monetary policy theory implies you might even want to
be more aggressive than the tailor rule. But in contrast, when you have shot to inflation that don't come directly from an overheating economy but also come from you know, other sources of increases in costs, you know, so the supply shocks that people talked about during the COVID inflation period, then these same models can imply very different predictions. They can imply that you don't want to raise interest rates nearly so much in response to inflation associated with these
kinds of shocks. So in our paper, what we do is we use a very standard monetary model, and we simulate data from this model where we assume that the monetary policy is actually exactly optimal, so the centerflike is really doing the right thing, and then we run regressions, you know, where we try to estimate what we get for the tailor role in this context. And then the interesting observation is that you find that actually a lot of times the coefficient on inflation is less than one.
Sometimes it's close to zero, sometimes it's even negative. So really a lot of things can happen when you deviate only from this view of inflation is coming from an overheating economy.
Did the FED do a good job?
The paper reads like vindication.
Yeah, because I think in twenty twenty five there's still plenty of fights about this question, what's your fake?
I think in so we don't know what's going to happen. Yeah, but I think in the long span of history, if you look at what happened over the past five years, I think this is going to look like a soft landing, and that is typically exactly what the Federal Reserve is trying to achieve. So, I mean, obviously, the FED appropriately and private sector forecasters took a lot of flak for saying that inflation was going to be very transitory when
inflation was significantly more persistent. That said, inflation did come down very quickly, and there hasn't been a recession, and that is remarkable. Not only has there not been a recession, and not only didn't place and come down very quickly, but longer term inflation expectations really did not become unhinged. Despite this historic increase in inflation, we haven't seen large
increases in longer term bond yields. So this is all pretty remarkable, and I would think that if things go well over the next five years, that in the longer at amount of history, this is going.
To look like a big success.
So this is where central bank independence and credibility actually comes into play when it comes to those longer term inflation expectations. How did you actually measure credibility in this paper? Because you don't look just at the FED, you look at a bunch of other.
Central banks, right, So when we look at other central banks, one of the things we point out is that there was a huge amount of variation in terms of how different central banks reacted to the COVID inflation. So we've been talking about the United States and similarly countries like Japan,
the UK, the Euro Area. These countries all raised interest rates very gradually and by very moderate amounts relative to the size of the inflation increases they were facing, and so they all took a lot of flack for raising interest rates too slowly, for being behind the curve, for not raising interest rates enough. And these are the countries we refer to in our paper as late risers because
they were late to the game right. But there were other countries in the world we referred to as early risers who raised interest rates a lot more aggressively and a lot earlier. And the interesting observation. You might have thought that these countries would have suffered from the fact the late riser countries would have suffered from the fact that they relate to the game in raising interest rates with having higher inflation than the early risers who responded
very aggressively, and in fact we find the opposite. So the early risers did respond very aggressively the COVID inflation, but they actually saw inflation rise by a lot more during this episode. So then we asked the question, well, what could explain that seems sort of backwards? You know, you have these countries that seemed to have responded very aggressively with interest rates and yet they saw the large
and more persistent inflationary surges. But then what we see is that those same countries are countries that have much more checkered inflation histories. So you asked about reputation, Well, a very simple way to ask about the reputation of a central bank for controlling inflation is just to look
at average inflation in the recent decades. And so we look at average inflation over the previous three decades, and we see that the early riser countries, the ones that you know probably felt they had to respond ery aggressively to the COVID inflation, also had much more checkered inflation histories.
They had much higher average inflation over the past three decades previous to COVID, And so I think a natural interpretation of these facts is that for these countries, they did not feel that they had the inflation fighting credibility of the central banks in the United States or in Japan or in the Euro Area. They did not feel that they had the kind of strongly anchored inflation expectations
that these countries could benefit from. And so for these countries, it really probably was not an option to think that they could look through the inflation and yet keep inflation expectations anchored. But yet that is actually what happened in the United States and several other of these late riser countries.
So I find this to be really fascinating. I want to get to the question of like whether the develop market or the US is like ground down its stock of credibility over the last five years, But I wanted to on this question of the early risers. I get what you're saying, but it's still not intuitive to me that the countries or the central banks with a sort of mediocre history of controlling inflation this time around were
really on the ball in unison. I mean, I would think that if a central bank has a history of missing its inflation target or letting inflation rise, that at least some of them would have done it again. They would have come in late, because that's what they do institutionally. Like how consistent is this process around the world, whereby the countries that have a track record were early risers this time.
Around, right, So we're not including every country, So there are some countries which are outliers in terms of their in terms of their response in terms of their inflation. But I think one of the things you have to recognize is that in the world as a whole, there has been quite a remarkable sort of triumph of central banks over inflation. So back in the nineteen seventies and nineteen eighties, almost every country was like what we see in the early risers today. So none of these countries
had really strong credentials as inflation fighters. And more recently there are a number of these countries which are kind of moving in the direction of having much stronger inflation fighting credentials. But at the same time, you know, these are countries where it's a relatively fresh history, you know. So you look at some of these countries where they had pretty high inflation in the past, yeah, and you know, and there's just sort of starting to be able to
get over it. And then the question is do you think that the public will be willing to watch you go through a period of say, ten percent inflation and say, oh, we're sure you're going to get it back to two percent, or do you think you know, there's going to be real question of whether you're going to be able to achieve that.
Okay, So if on the other hand, you do have good credibility, you do have a good history of inflation fighting, then you can kind of spend that social capital, I guess, and avoid having to raise interest rates by as much as you know, maybe another central bank that doesn't have that credibility walk us through what exactly are the benefits of not having to do.
That, of not having to raise race rise Absolutely well, you get closer to optimal monetary policy. So in the models, you know, the basic idea is, for example, if you have one of these cost push shocks, where there's a shock that is going directly to inflation because of increases in costs or bottlenecks of various types, or you have a shock like during COVID to people's demand for goods
versus services. If you raise the interest rate dramatically, like the tailor rum might have predicted you, it is interesting to ten percent. So what's going to have to happen to get inflation down to zero in the short run. Well, maybe you're going to have to have a big recession. You're going to have to have one part of the economy completely collapse.
You know, Trump will tweet at you more or post on truth social more.
Probably you're going to have to have really negative inflation in some sectors of the economy, and you're going to have to have a big recession. And potentially, you know the other issue is that there's a lot of evidence suggesting that monetary policy has pretty delayed effects. So another concern, and as I said, you know in this episode, professional forecasters and the FED both thought that the inflation would
be more transitory than it actually was. But another concern is if you think that the shocks that are causing the inflation are sort of going to dissipate on their own, and you think that monetary policy has going to take some time to have an effect, then one of the concerns is that by the time the monetary policy actually has a large effect, then you know, some of these
shocks are going to dissipate. And then I guess the third thing I would mention is that in theory, the central bank actually wants to use a combination not only of current interest rate movements but also a forward guidance. So this is one of the big innovations in monetary
policy over recent decades. We think about forward guidance a lot in the context of the zero lower bound, when you can't do anything with FED funds rate, and so it's all about forward guidance, but actually forward guidance is a much much more general phenomenon. It's really whenever the central bank is calling it shots about what it's going to do with interest rates, even over the next year.
So this was hugely important during the COVID inflation research, because the FED started talking about raising interest rates and a longer term bond yield started rising pretty rapidly in late twenty twenty one, substantially before the FED funds rate actually started to rise rapidly. And in the theory, a central bank that has that power, it has the ability to affect the economy not just through what it does with the FED funds rate, but also through its words
an impact on the bond market. Through that channel, we'll actually want to use both. And so that's another advantage of not being bound by these kinds of constraints.
The strikes me is an incredibly important point, which is that you can tighten monetary policy by talking, by saying, and so that just by looking at that overnight rate that the rule might anticipate, et cetera, does not necessarily capture the stance of monetary at that time if you're already indicated and you're pulling forward those raid hikes. So do we have less credibility today?
You know?
So, Okay, maybe the FED did a good job in this time. Nonetheless, there was this very big inflationary episode, et cetera. So after years of very cool inflation, finally we got a big one. Going forward, does that mean the next time around, if there is another inflationary shock for whatever reason, that the FED might be impelled to be more of an early riser than it felt in this cycle.
I would think almost definitely yes. Remember that going into the COVID inflation, you know, regular pe hadn't seen significant amounts of inflation for years. It just wasn't really part of the mindset of anyone. You know, when you saw, for example, unions, in wage negotiations or other contexts things where inflation should have been relevant, it was sort of
striking that it just wasn't on anyone's mind. And it even took a while after the inflation started for people to even think about this, because it had become so much of a non issue for so many years that it was just not part of the mental frame of Americans. I see this very much when I teach students, because for American students, typically I have to do a lot of work to just explain the difference, for example, between a nominal interest rate and a real interest.
I did not earn interest on my bank account for most of my adult life, so.
I see exactly. But in contrast, for Latin American students, they get in immediately because it's just part of how they grew up, right, And I think that that distinction has probably blurred at least a little bit, right because now people have gone through a few years where it mattered to pay a little bit of attention to inflation.
And so my guess is that if we start to see inflation again, it's going to be, you know, a much more rapid transition to where people will start to ask whether this is going to last longer, whether now that we've seen you know, two inflationary episodes in the recent past, whether this is sort of the new normal. You know. I think it's important not to forget how hard one those expectations of low inflation were for the
Federal Reserve in many other countries. You know, it's certainly something that can dissipate.
So, because we're dealing with the tailor rule, which basically, you know, suggests or describes either way, what the central bank should do with interest rates in response to inflation and changes in the output gap. We're talking basically about like the impact of shocks to that output gap. There's a nuance here because like shocks can be different and have different effects on the output gap. What type of
shock would tariffs be? I know this isn't the subject of your paper, but you know your gut instinct, how would you describe tariffs in terms of that economic shock and the impact on output?
So there have been a number of recent academic papers on this. It's not the focus of our paper, but I think that the overall message of those papers is that you do want to look through sort of the initial impact of the tariffs, but you don't want to
look through sort of second round effects. So to the extent that you start to see an effect in terms of longer run inflation expectations becoming unhinged and so on, that's the part of the inflation that the central bank would want to be responding aggressively to.
I have another question that maybe outside the scope of this specific paper, but.
It has a lot of relevance to today.
There's a lot when you think about around the world, some central banks have more credibility than some others. Is it that the good central banks just had like smarter, better economists, advising them better on policy than the other ones. Or does it have more to do with the political conditions that allow a central bank to operate separately from to essentially operate with independent agency, And is that more of a thing that originates in the political sphere of those countries.
I think clearly the politics is very important. I guess it would point to two things. One is those difficult decades of the nineteen seventies and nineteen eighties which occurred in many countries around the world, and where people in these countries realized how much they hated inflation. We got a little bit of a taste of this during the
COVID inflation. Inflation just is incredibly unpopular. And it was for this reason that it was possible in the United States to appoint Paul Wolker as chairman of the thing, even though it was known before he was appointed what he was going to do, that he was going to raise interest rates aggressively, that this was going to be painful, And so that's a remarkable thing that it was actually possible to make this appointment. But of course similar things
actually happened in other countries as well. There were similar appointments of aggressive, you know, central bankers that controlled inflation. So I think part of this did come out of,
you know, sort of a public reaction to inflation. But at the same time, it didn't happen everywhere, just like you said, and could only have been in the context of political protection for the central central bank independence and perhaps in some ways it's just sort of a remarkable thing that it ever did happen, that we've seen this long period of low inflation in many of these countries.
I something realized I've heard over the years at various times where we're deviations from the Taylor rule, whether it was the zero lower boundar era or it couldn't lower them, or more recently, how far were they off in the seventies when inflation was going crazy? There is there a good measure of like, no, clearly they should have been higher. This like, what does the tailor rules say about that?
The nineteen seventies very interesting because one of the things we point out in our paper is that the predictions and the prescriptions of the Tailor rule are of course only as good as the inputs you put into them.
And one of the things that some of the academic literatures pointed out is that you don't necessarily want to use the data that we have today on something like the output gap, because views about the output gap, that is, you know, how overheating is the economy have changed over time, and in particular, in the nineteen seventies, the Federal Reserve was pretty optimistic about the potential output of the US economy, and for that reason, its judgment about the output gap
was pretty negative. And this helps to explain, through the lens of the tailor rule, why they had pretty dubvish
monetary policy in the nineteen seventies. So actually, if you take the real time data on what the FED said it thought the output gap was at the time I'm along with inflation, then you get more or less what they did and what happened in terms of, you know, why many people think that the policy was two douvison in the nineteen seventies has a lot to do whether you think those measures of the output gap were reasonable, and you know, the current estimates according to the Fed,
you know, are much less sort of dubvish than they were at the time. But it highlights the fact that even when you want to create a rule which is sort of very technocratic and doesn't give you any wiggle room. That's not entirely true, because something like the output gap is not something that you can just read off a statistic like inflation. Actually you can, and so as a consequence, you know, it really matters what judgment you take about where you are relative to the economy's potential.
You can never escape human you never quite escape human judgment, unfortunately.
I remember that the output gap debate was a big thing after two thousand and eight as well. Okay, just going back to the idea of this technocratic rule, whether it's scriptive or descriptive, I know people have different opinions on that, but supposedly one of the benefits of it being possibly prescriptive was that you have a central bank that like does a very expected thing, like you know what the reaction function is and you know what they're
going to do in response to inflation. How does that play into the credibility aspect, because on the other hand, you know, more credible central banks, they can kind of go off and do their own thing, go beyond the tailor rule, as you put it in the paper. But on the other hand, does that unexpected behavior perhaps have an impact on their own credibility, even if it's successful in the short term.
Absolutely, I mean, I think that the technocratic rules, like the tailor rule, they absolutely have a place in the canon of monetary policy. And you know, perhaps one could even argue that they should be the default in response to many kinds of inflationary episodes, because there are many kinds of inflationary episodes, like those associated with excessive demand, you know, an overheating economy and all so even worse, just sort of self fulfilling worries about inflation that spiral
off into really serious inflationary episodes. So in response to all of those kinds of episodes, you know, it may may be a very good idea for people to be able to expect that central bank is going to respond aggressively along the lines of something like the tailor rule.
And there's a sense in which you might want to think about going beyond the tailor rule as something that you don't do all the time, but that you recognize has to happen some of the time when you have a strong sense that a different kind of shock is hitting the economy, and in some of those episodes, you
might actually want to very explicitly use forward guidance. So, for example, during the Great Recession, that was a period when there was you know, some of the most explicit usage of forward guidance to talk about the timing of how long the FED was going to keep interest rates at zero, and that was a very powerful tool in terms of affecting longer term interest rates. It's very easy to see that in the data. And that's the kind of thing where you know, it's not about going away
from reputation, which it's true. That core idea is that you want markets to absolutely be confident that the central bank is going to respond aggressively to any sense of de anchoring of inflation expectations, and that is very important, but at times you may want to use for guidance in other ways, and the response of the fad to the Great Recession as an example of that.
I just have one last question, and it's kind of selfish. So you're talking about, you know, different sources of inflation, whether it's access demand or whether it's supply. Tracy and I did like a ton of podcast episodes in twenty twenty one twenty twenty two about supply chains. We talked about the ports and all this stuff that you know, but someone could say, you guys were missing the forest for the trees. Distress at the ports wasn't about supply
Chaine was because there was too much demand. Distress at the X factory was it because of some supply chain or missing part. There was just too much demand. You guys were just disguised ueeing demand problems by focusing on choke points that are inevitably going to emerge when booming demand. I still think about this. I'm like, oh, should we have focused on you know, I'm like, but you have described a lot of this inflation, and part of the reason for the Meca disinflation is because a lot of
it was supply defense. You know, I'm looking for a defense of all this focus that we did on the supply side.
So I think you're you're right that there's kind of a false dichotomy between talking about demand shocks and things like supply constraints, you know, like the ports and the Suez Canal and so on, Because you're right that if you have too much demand then at some point, you know, these supply chains get clocked, and so it's it's it's absolutely right that those kinds of supply constraints are not quite the same as supply shocks, right, But there are other things which are just directly shocked.
The war in Ukraine was a shocked.
Exactly, and COVID, for example, generated all sorts of sort of negative productivity throughout the economy that just made things more expensive to produce in a variety of ways. So these are some of the things that I think are genuinely basically negative productivity shocks, which were sort of hard to find examples of previous to COVID, but easy to find examples of during COVID.
How could are policy makers at identifying types of shocks in real time?
That is a very important question. And you know, I think my discussion of the nineteen seventies and the fact that you know, views have changed over time about the output gap during that period and also during the COVID inflation, you know, views of change shows that this is by
no means perfect. But at the same time, I think there are times when there's a strong sense that, you know, the COVID inflation, for example, wasn't just about you know, self fulfilling inflation expectations or something like this, And so that's where I want to emphasize this idea that there's a difference between saying that we can always identify the shocks with confidence, which clearly we cannot, and saying that we can never identify any shocks, you know, to the
extent that we need to tire ours all the time to a mechanical rule, which you know, may deviate from what theory really says is opt to a monetary policy. But again, you know, I think crucial ideas is all of this has to take place against the background where there's sort of confidence in the central banks commitment to longer run inflation stability.
All right, Emmy Nakhimura, thank you so much. This was a real treat for us. I kind of want to go to Berkeley now.
Yeah, I know it's a I did.
So.
That was amazing. Thank you so much. That was fantastic.
Thank you. That was great. Joe, that was fantastic. I really enjoyed that conversation. And Emmy has a remarkable way of explaining like some complicated concepts, yeah, very simply and in a real understandable way, because if you flip through her paper, there's a lot of formulas and things like that. So it looks complicated, but she explained it very.
Clearly, incredibly clearly. I had the same thing. I was like, oh, man, it would be so nice to just be like a student and like alert, you know, get to a student. Sounds very fun but incredibly clear. And you know, she's, you know, one of the foremost inflation experts in sort of academia. And so to hear her sort of like sort of summation of how she thinks about the last five years and the lessons learned from it was like a real treat Yeah.
And obviously there are a couple of takeaways there. So one, it is incredibly hard for policy or often incredibly hard for policy makers to identify shocks, you know, at the moment that they're happening, but sometimes they can, like in COVID And I guess the second takeaway is the importance
of credibility. Yeah, right, And if you manage to successfully control inflation for years and years and decades or whatever, you build up that social capital which then allows you to be somewhat more flexible when you have another crisis.
Yeah. I thought that was very interesting. Also, there are a couple other things that's struck me. First of all, until reading this paper. And this is just my fault because I could look this up at any time. I hadn't realized that the tailor rule was built up six years of data. There's like, Okay, this is the rule that describes when a central bank.
Is a monetary policy.
Basically, this is the rule that sort of describes what a well functioning central bank looks like is basically six years. You know. That's interesting. That's interesting to me too. And second of all, this idea that even though it does look like a hard rule, that you can't escape the
fact that you have to judge the output gap. And there were very big debates about the size of the output gap after two thousand and eight and two thousand and nine, very sharp disagreements about the capacity or what full employment looked like. So even that doesn't fully solve you. Even if you do tie yourself to the lash of a hard rule or lash yourself to the mast of a hard rule, the tough problem.
Still yeah, it's it's tough, all right, leave it there, Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Jill Wisenthal. You can follow me at the Stalwart. If you want to read Emmy's paper, go check out the Kansas City Fed's website. Follow our producers Kerman Rodriguez at Kerman armand Dashel Bennett at Dashbot and Kilbrooks at Kilbrooks. For more Oddlots content, go to Bloomberg dot com slash odd Lots we're the daily newsletter and all of our episodes, and you can chat about all of these topics twenty four seven in our discord Discord dot gg slash out Lots.
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