12/12/2019

The business cycle is dying

"During the postwar period, monetary policy was under the influence of a rather simplistic Keynesian model. The problems of the 1970s and early 1980s led to a Keynesian/monetarist synthesis called “New Keynesianism”, which incorporated monetarist ideas such as the Natural Rate Hypothesis and the importance of the Fisher effect. It also incorporated Keynesian ideas such as interest rate targeting and policy activism. The Taylor Rule is a simple way of thinking about this synthesis.

As monetary policy became more effective, recessions became much less frequent. Importantly, this process is likely to continue. If we achieve America’s first ever soft landing over the next 2 or 3 years (as I anticipate), then I would expect only one recession during the next 37 years.

The economics profession has not yet fully absorbed the implications of improved monetary policy."