Better Living through Monetary

By John B. Taylor Stanford University January 2008 Ten years ago macroeconomists began noticing and studying a remarkable change in the performance of the U.S. economy. The economy had become much more stable than in the past. The change appeared to occur some fifteen years earlier, in the early 1980s. Not only had inflation and interest rates and their volatilities diminished compared with the experience of the 1970s, but the volatility of real GDP had reached lows never seen before. It appeared that economic expansions were becoming longer and stronger while recessions were becoming rarer and shorter. At the time I called this phenomenon the Long Boom (Taylor(1998). It was as if there was one long growth expansion starting with the end of the deep recession in November 1982 and continuing right through its fifteenth anniversary in November 1997, with the mild 1990-91 recession seeming like a small interruption compared to recessions of the past. Others called the phenomenon the Great Moderation (Blanchard and Simon (2001)), because of the general decline in volatility of output growth and the inflation rate. I conjectured that the improved macroeconomic performance could be explained by a regime shift in monetary policy, which also appeared to occur in the early 1980s. I argued that this shift in monetary policy could be explained by a major change in