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In this special Grumpy Economist Weekly Rant, John Cochrane highlights a new Hoover Institution Press volume honoring economist John Taylor and his far-reaching contributions to macroeconomics, monetary policy, international economics, public service, and economic liberty. Cochrane explains why Taylor’s most famous contribution—the Taylor Rule—became central to modern monetary theory and practical central banking.
Cochrane shows how Taylor helped shift the way economists and central bankers think about the Federal Reserve: away from a narrow focus on money supply and toward a systematic framework for setting interest rates in response to inflation and output fluctuations. The result is a model of scholarship that combines theory, policy judgment, and institutional practice—helping central bankers understand not only what the Fed controls, but how monetary policy should respond when inflation and economic conditions change.
To learn more or order the book, visit the Hoover Institution Press page:
A Celebration Honoring John B. Taylor’s Contributions to Economics and Monetary Policy
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution, and welcome to my Grumpy Economist Weekly Rant.
This week, I’m not going to rant, I’m going to sell. We have a wonderful volume coming out from the Hoover Institution Press, a celebration of John Taylor. It’s a volume that results from a conference we gave about a year ago in honor of John and his many contributions.
In John’s style, everybody was asked to write down what they had to say and publish it as a volume. And it is a wonderful testament, as well as an interesting compilation, of all the wonderful things John has done.
There’s an introductory chapter by me, of course, with Michael Bordo and Jon Hartley that I recommend on John’s overall contributions. You may not know it: John did a lot for international economic policy. He did a lot in the government, and he has been, as you probably know, a stalwart defender of free markets and economic liberty.
But John is known, of course, for the Taylor Rule in macroeconomics. Why is that so important? It seems so simple. The Fed should raise interest rates systematically, more than one-for-one with inflation, and also in response to output fluctuations.
Before John came along, we thought about the Fed in terms of money supply and money demand. Milton Friedman famously said the Fed should control the money supply, but the Fed doesn’t control the money supply. The Fed controls interest rates.
How do we think about the Fed, given that it controls interest rates, raises them, and lowers them? What is the theory of inflation under interest-rate targets, not money supplies and money demands?
John Taylor’s Rule was the critical ingredient in the modern development of that theory, which, of course, I appreciate as a monetary theorist. But it also gave practical advice to central bankers on how they should operate on a day-by-day basis.
That combination of theory, common sense, practice, and outreach to the world of central banking is what made John so influential. And that’s just a little bit of what we talk about in the volume.
Go take a look now. It’s available at the Hoover Institution Press website, and also the contributions are available online if you’re too cheap to buy a book, though it’s a very pretty book.
Thanks. I hope you like this rant, and don’t forget to click to subscribe.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.