"Modifications of the rule such that central bank rates respond to spreads can be shown to deliver good results in prototype financial-inclusive DSGE models. But these models are just a beginning, and certainly not the last word, on how to describe the financial sector. "This suggests one of the ways that the rule could be modified. Clearly, this may take the rule from being a description to being a prescription. What other factor could be included in a model for each of these uses? Where are the examples of these financial modifications?
Monday, April 20, 2015
Tony Yates on John Taylor
Weekend Reading: Tony Yates on John Taylor (Brad DeLong's Grasping Reality...): There is a discussion of the use and abuse of the Taylor rule. One of the weaknesses of the rule is that it does not include the financial sector.