John Taylor [here/here] recently reiterated his views on what caused the global financial crisis.
He contends the following. That the Great Moderation was due to adherence to the Taylor Rule [and to ‘rules-based’ fiscal policy]. That during the early 2000s, monetary policy was set looser than that prescribed by the Taylor Rule. This caused the build up of debt and risk-taking, which ultimately led to the bust, and the end of the Great Moderation. Weak activity following the crisis has been due to departures from rules based monetary policy, in the form of unconventional monetary policy. And departure from rules based fiscal policy, in the form of the fiscal stimulus enacted by Obama in 2009. These departures have created uncertainty that has weighed against activity. Tighter policy on both counts would have led to more buoyant activity during the recovery on account of being more certain.
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