Economy conference draws focus to Prof. Taylor’s work

Jan. 12, 2010, 12:02 a.m.

Stanford professors featured heavily in last week’s annual conference of the American Economic Association held in Atlanta, Georgia.

The event, which took place from Jan. 3 to Jan. 5, featured presentations from many of the top minds in the field of economics, including Federal Reserve Chairman Ben Bernanke, Nobel laureates Joseph Stiglitz and Paul Krugman and Yale economics Prof. Robert Shiller.

Serving as chair of the conference’s program committee was Robert E. Hall, economics professor and senior fellow at the Hoover Institution, who is also the current president of the AEA.

“The event went very well this year,” Hall said. “We accomplished all we had hoped to. People don’t like Atlanta, but attendance was at an all-time high.”

The highlight of the event was Bernanke’s controversial speech on the causes of the housing bubble. Of central importance to the speech was the so-called Taylor rule, developed by Stanford economics Prof. John Taylor, also a senior fellow at the Hoover Institution.

In the aftermath of the collapse, some argued that the extremely low interest rates set by the Fed throughout the decade led to cheap loans and reckless lending by banks, contributing to the financial crisis. But in his speech, Bernanke argued that insufficient regulation of lenders, not overly accommodating monetary policy, was primarily responsible for the downturn.

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Bernanke said in his Jan. 3 speech.

The Federal Reserve is the institution that sets interest rates, and Bernanke has served on it, first as a member of the Board of Governors and then as its chairman, for most of the decade. Bernanke’s attempt to downplay the importance of low interest rates to the financial crisis may tie to the issue of the Fed’s responsibility in the development of the crisis.

Many who disagree with Bernanke’s assessment point to the Taylor rule to support their arguments, which Bernanke acknowledged through directly addressing it in his remarks.

The Taylor rule, one of the most significant equations in macroeconomics, indicates what the interest rate should be based on current levels of inflation and GDP. Throughout the decade, the actual rate set by the Fed was significantly lower than the interest rate prescribed by the Taylor rule.

Bernanke dedicated nearly a third of his speech to a justification of this deviation. He used a modified version of the Taylor rule to attempt to demonstrate that interest rate levels were, in fact, appropriate over the past several years. His adjustments focused upon the sensitivity of many data inputs that factor into the rule, according to The Wall Street Journal, and included a shift from using actual inflation measures to forecasts of inflation.

Taylor disagreed with Bernanke’s defense of the Fed’s low rates and his modifications of the rule. “I do not agree with his proposed modification,” Taylor told The Daily. “One issue is: whose forecasts should you use? The Fed’s forecasts of inflation were too low at that time.”

Taylor also indicated worry about the policy implications of Bernanke’s speech going forward. “His speech raises the concern that the Fed will keep rates too low for too long again in the future,” Taylor said. “That would be a mistake because it would lead to another boom-bust cycle.”

Taylor, who authored the textbook used in Economics 1A, has taught at Stanford since the early 1980s, receiving several teaching prizes. He has also been active in politics throughout his career, serving as the undersecretary of the Treasury Department during Pres. George W. Bush’s first term.

Others, though, were more receptive to Bernanke’s arguments.

“I think he [Bernanke] was basically right,” Hall said. “His interpretation of the Taylor rule fits my thinking, but it disagrees somewhat with John Taylor. The question will continue to be debated.”

Another important function of the AEA conference is professional, especially for young scholars. Hundreds of new Ph.D. candidates attend the event every year to network and interview with prospective employers.

“Job listings were down 20 percent this year, but there were still lots of activity in the job market,” Hall said. “Perhaps the most important purpose of the conference is this role of bringing new Ph.D.s and employers together.”

About 15 Stanford graduate students attended the event this year.

“The event is pretty spectacular,” said Bill Komiss Ph.D. ’09. Komiss graduated from Stanford’s economics graduate department last year. He attended the event in 2009 as a new Ph.D. looking for a job, and he returned this year as a recruiter for his new employer, the Center for Naval Analysis.

“It’s a great chance to listen to research that you have been interested in and to become interested in new things,” Komiss said. “The struggle to get a job is a bit jarring. I remember having 17 interviews in a three-day span, spread across five hotels. There was not enough Starbucks coffee in San Francisco to fuel us all.”

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