John B. Taylor

John Brian Taylor (born December 8, 1946) is an economics professor at Stanford University.

Born in Yonkers, New York, he earned his A.B. from Princeton University in 1968 and Ph.D. from Stanford in 1973, both in economics. He taught at Columbia University from 1973-1980 and the Woodrow Wilson School of Princeton from 1980-1984 before returning to Stanford. He has received several teaching prizes and used to teach Stanford's introductory economics course.

An expert on monetary policy, in a 1993 paper he proposed the Taylor rule, which provides a guide to central banks on how to determine interest rates. He has also been active in politics, serving as the Under Secretary of the Treasury for International Affairs during the first term of the Bush Administration. He was also a member of the President's Council of Economic Advisers during the Ford and George H. W. Bush administrations.

Academic contributions

Taylor contributed to the development of mathematical methods for solving macroeconomic models under the assumption of rational expectations. In 1977, Taylor and Edmund Phelps, simultaneously with Stanley Fischer, showed that monetary policy is useful for stabilizing the economy if wages are sticky, even when all workers and firms have rational expectations. This demonstrated that some of the earlier insights of Keynesian economics remained true under rational expectations. This was important because Thomas Sargent and Neil Wallace had argued that rational expectations would make macroeconomic policy useless for stabilization; the results of Taylor, Phelps, and Fischer showed that Sargent and Wallace's crucial assumption was not rational expectations, but perfectly flexible prices.

Taylor's model of overlapping wage contracts became one of the building blocks of the New Keynesian macroeconomics that rebuilt much of the traditional IS-LM model on rational expectations microfoundations. The New Keynesian economists went on to explore what types of monetary policy rules would most effectively reduce the societal costs of business cycle fluctuations: should central banks try to control the money supply, the price level, or the interest rate; and should these instruments react to changes in output, unemployment, asset prices, or inflation rates? Taylor's 1993 paper in the Carnegie-Rochester Conference Series proposed that a simple and effective central bank policy would manipulate short-term interest rates, raising rates to cool the economy whenever inflation or output growth becomes excessive, and lowering rates when either one falls too low. Taylor's interest rate equation has come to be known as the Taylor rule, and it is now widely accepted as an effective formula for monetary decision making. Some empirical estimates indicate that many central banks today act approximately as the Taylor rule prescribes, but had failed to act according to the Taylor rule during the inflationary spiral of the 1970s.

Selected publications

Phelps, Edmund S., and John B. Taylor (1977), 'Stabilizing powers of monetary policy under rational expectations.' Journal of Political Economy 85 (1), pp. 163-90.
Taylor, John B. (1979), 'Staggered wage setting in a macro model'. American Economic Review, Papers and Proceedings 69 (2), pp. 108-13. Reprinted in N.G. Mankiw and D. Romer, eds., (1991), New Keynesian Economics, MIT Press.
Taylor, John B. (1979), 'Estimation and control of a macroeconomic model with rational expectations'. Econometrica 47 (5), pp. 1267-86.
Taylor, John B. (1986), 'New econometric approaches to stabilization policy in stochastic models of macroeconomic fluctuations'. Ch. 34 of Handbook of Econometrics, vol. 3, Z. Griliches and M.D. Intriligator, eds. Elsevier Science Publishers.
Taylor, John B. (1993), 'Discretion versus policy rules in practice'. Carnegie-Rochester Conference Series on Public Policy 39, pp. 195-214.
Taylor, John B. (1999), 'An historical analysis of monetary policy rules'. Ch. 7 of John B. Taylor, ed., Monetary Policy Rules, University of Chicago Press. Paperback edition (2001): ISBN 0226791254.