Inflation, Unemployment, and Monetary Policy - Solow and Taylor

Wednesday, March 30, 2011
"We have learned much about the unemployment-inflation trade-off and about monetary policy during the last 25 years. Both economic research - especially the research surrounding the rational expectations revolution of the 1970s - and historical experiences - in particular, the inflation and disinflation of the 1970s and 1980s - have contributed to this improved understanding. In my view the change in thinking is of the same magnitude as that associated with the research surrounding the Keynesian revolution and the historical experience with the Great Depression in the 1930s. I would summarize the conclusions of the recent research and historical experience as follows. First, there is substantial theoretical support and empirical evidence demonstrating that there is no long-run trade-off between the level of inflation and the level of unused resources in the economy... Second, there is also substantial theoretical support and empirical evidence of short-run monetary non-neutrality... Third, a general implication of research on credibility, time inconsistency, and rational expectations is that monetary policy should be viewed and conducted as much as possible as a contingency plan, or a policy rule... Fourth, although there is still much ongoing research on the most appropriate type of monetary policy rule to use in practice, progress has been made in determining the broad characteristics of a good monetary policy rule." - John B. Taylor (p 29-31) in Solow and Taylor, 1998. Get it here. Inflation, Unemployment, and Monetary Policy (Alvin Hansen Symposium Series on Public Policy) Robert M. Solow and John B. Taylor  Massachusetts: Massachusetts Institute of Technology, 1998.