An argument that a rules-based reform of the international monetary
system, achieved by applying basic economic theory, would improve
economic performance.
In this book, the economist John Taylor argues that the apparent
correlation of monetary policy decisions among different
countries--largely the result of countries' concerns about the exchange
rate--causes monetary policy to deviate from effective policies that
stabilize inflation and the economy. He argues that a rules-based reform
of the international monetary system, achieved by applying basic
economic theory, would improve economic performance.
Taylor shows that monetary polices in recent years have been deployed
either defensively, as central banks counteract forces from abroad that
affect the exchange rate, or offensively, as central banks attempt to
move the exchange rate to gain a competitive advantage. Focusing on the
years from 2005 to 2017, he develops an empirical framework to examine
two monetary policy instruments: the policy interest rate (the more
conventional of the two) and the size of the balance sheet. He finds
that an international contagion in central bank decisions about the
policy interest rate has accentuated the deviation from standard
interest rate rules that have worked in the past. He finds a similar
contagion in decisions about the size of the balance sheet. By
considering a counterfactual policy in the estimated model, Taylor is
able to estimate by how much the policy of recent years has increased
exchange rate volatility. After several rounds of monetary actions and
reactions aimed at exchange rates, Taylor finds, the international
monetary system is left with roughly the same interest rate
configuration, but much larger balance sheets to unwind.
