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Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis



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Getting Back on Track Macroeconomic Policy Lessons from the Financial Crisis John B Taylor This article reviews the role of monetary and fiscal policy in the financial crisis and draws lessons for future macroeconomic policy It shows that policy deviated from what had worked well in the previous two decades by becoming more interventionist less rules based and less predictable The policy implications are thus that policy should get back on track The article is a modified version of a presentation given at the Federal Reserve Bank of Philadelphia s policy forum Policy Lessons from the Economic and Financial Crisis December 4 2009 The presentation was made during a panel discussion that also included James Bullard and N Gregory Mankiw Federal Reserve Bank of St Louis Review May June 2010 92 3 pp 165 76 I started doing research on the financial crisis in the spring and summer of 2007 just before the crisis flared up in August of that year From the start my approach has been empirical I have not focused on who said what to whom when however interesting and ultimately important that story is Rather I looked at the timing of events and at data at interest rates stock prices credit flows money supply housing starts income consumption using statistical techniques and simple charts concentrating on what is amenable to economic analysis I also tried to use the discipline of counterfactuals or stating what alternative policies or events would have been and using economic models to examine the impacts I looked at economic policy throughout the crisis including the period leading up to the panic in the fall of 2008 and the year and a half since then What I have found since the start of this research is that government interventions many wellintentioned government interventions did a great deal of harm With these findings in mind I wrote one of the first books on the crisis it was based on a November 2008 speech in honor of David Dodge the former governor of the Bank of Canada I



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