In research published in 1979 and 1980 he developed a model of price and wage setting—called the staggered contract model—which served as an underpinning of a new class of empirical models with rational expectations and sticky prices—sometimes called new Keynesian models. In a 1993 paper he proposed the Taylor rule, intended as a recommendation about how nominal interest rates should be determined, which then became a rough summary of how central banks actually do set them. He has been active in public policy, serving as the Under Secretary of the Treasury for International Affairs during the first term of the George W. Bush Administration. His book Global Financial Warriors chronicles this period. He was a member of the President's Council of Economic Advisors during the George H. W. Bush Administration and Senior Economist at the Council of Economic Advisors during the Ford and Carter Administrations.
Taylor’s research—including the staggered contract model, the Taylor rule, and the construction of a policy tradeoff (Taylor) curve employing empirical rational expectations models—has had a major impact on economic theory and policy. Former Federal Reserve Chairman Ben Bernanke has said that Taylor's “influence on monetary theory and policy has been profound,” and Federal Reserve Chair Janet Yellen has noted that Taylor's work “has affected the way policymakers and economists analyze the economy and approach monetary policy."
Taylor contributed to the development of mathematical methods for solving macroeconomic models under the assumption of rational expectations, including in a 1975 Journal of Political Economy paper, in which he showed how gradual learning could be incorporated in models with rational expectations; a 1979 Econometrica paper in which he presented one of the first econometric models with overlapping price setting and rational expectations, which he later expanded into a large multicountry model in a 1993 book Macroeconomic Policy in a World Economy, and a 1983 Econometrica paper, in which he developed with Ray Fair the first algorithm to solve large-scale dynamic stochastic general equilibrium models which became part of popular solution programs such as Dynare and EViews.
Taylor’s research on monetary policy rules traces back to his undergraduate studies at Princeton.
He went on in the 1970s and 1980s to explore what types of monetary policy rules would most effectively reduce the social costs of inflation and business cycle fluctuations: should central banks try to control the money supply, the price level, or the interest rate; and should these instruments react to changes in output, unemployment, asset prices, or inflation rates? He showed that there was a tradeoff—later called the Taylor curve—between the volatility of inflation and that of output. Taylor's 1993 paper in the Carnegie-Rochester Conference Series on Public Policy proposed that a simple and effective central bank policy would manipulate short-term interest rates, raising rates to cool the economy whenever inflation or output growth becomes excessive, and lowering rates when either one falls too low. Taylor's interest rate equation has come to be known as the Taylor rule, and it is now widely accepted as an effective formula for monetary decision making.
A key stipulation of the Taylor rule, sometimes called the Taylor principle, is that the nominal interest rate should increase by more than one percentage point for each one-percent rise in inflation. Some empirical estimates indicate that many central banks today act approximately as the Taylor rule prescribes, but violated the Taylor principle during the inflationary spiral of the 1970s.
Taylor's recent research has been on the financial crisis that began in 2007 and the world economic recession. He finds that the crisis was primarily caused by flawed macroeconomic policies from the U.S. government and other governments. Particularly, he focuses on the Federal Reserve which, under Alan Greenspan, a personal friend of Taylor, created "monetary excesses" in which interest rates were kept too low for too long, which then directly led to the housing boom in his opinion. He also believes that Freddie Mac and Fannie Mae spurred on the boom and that the crisis was misdiagnosed as a liquidity rather than a credit risk problem. He wrote that, "government actions and interventions, not any inherent failure or instability of the private economy, caused, prolonged, and worsen the crisis."
Taylor’s research has also examined the impact of fiscal policy in the recent recession. In November 2008, writing for The Wall Street Journal opinion section, he recommended four measures to fight the economic downturn: (a) permanently keeping all income tax rates the same, (b) permanently creating a worker's tax credit equal to 6.2 percent of wages up to $8,000, (c) incorporating "automatic stabilizers" as part of overall fiscal plans, and (d) enacting a short-term stimulus plan that also meets long term objectives against waste and inefficiency. He stated that merely temporary tax cuts would not serve as a good policy tool. His research with John Cogan, Tobias Cwik, and Volcker Wieland showed that the multiplier is much smaller in new Keynesian than in old Keynesian models, a result that was confirmed by researchers at central banks. He evaluated the 2008 and 2009 stimulus packages and argued that they were not effective in stimulating the economy.
In a June 2011 interview on Bloomberg Television, Taylor stressed the importance of long term fiscal reform that sets the U.S. federal budget on a path towards being balanced. He cautioned that the Fed should move away from quantitative easing measures and keep to a more static, stable monetary policy. He also criticized fellow economist Paul Krugman's advocacy of additional stimulus programs from Congress, which Taylor said will not help in the long run. In his 2012 book First Principles: Five Keys to Restoring America’s Prosperity, he endeavors to explain why these reforms are part of a broader set of principles of economic freedom.
Reprinted in Taylor, John B. (1991), "Staggered wage setting in a macro model", in Mankiw, N. Gregory; Romer, David, New Keynesian economics, volume 1, Cambridge, Massachusetts: MIT Press, pp. 233–42, ISBN 9780262631334.
Taylor, John B. (1986), 'New econometric approaches to stabilization policy in stochastic models of macroeconomic fluctuations'. Ch. 34 of Handbook of Econometrics, vol. 3, Z. Griliches and M.D. Intriligator, eds. Elsevier Science Publishers.
Taylor, John B. (1999), "An historical analysis of monetary policy rules", in Taylor, John B., Monetary policy rules, Chicago: University of Chicago Press, ISBN 9780226791265.
Taylor, John B. (2007). Global financial warriors: the untold story of international finance in the post-9/11 world. New York: W.W. Norton. ISBN 9780393064483.
Taylor, John B. (2008), "Housing and monetary policy", in Reserve Bank of Kansas City, Housing, housing finance, and monetary policy: a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 30-September 1, 2007, Kansas City, Missouri: Reserve Bank of Kansas City, pp. 463–76, OCLC170267547
Taylor, John B. (2009), "The financial crisis and the policy response: an empirical analysis of what went wrong", in Bank of Canada Staff, Festschrift in honour of David Dodge's contributions to Canadian public policy: proceedings of a conference held by the Bank of Canada, November, 2008, Ottawa: Bank of Canada, pp. 1–18, ISBN 9780660199276.
Taylor, John B. (2009). Getting off track: how government actions and interventions caused, prolonged, and worsened the financial crisis. Stanford, California: Hoover Institution Press. ISBN 9780817949716.
Taylor, John B.; Shultz, George P.; Scott, Kenneth, eds. (2009). Ending government bailouts as we know them. Stanford, California: Hoover Institution Press. ISBN 9780817911287.
Reprinted in Taylor, John B. (1991), "Staggered wage setting in a macro model", in Mankiw, N. Gregory; Romer, David, New Keynesian economics, volume 1, Cambridge, Massachusetts: MIT Press, pp. 233–242, ISBN 9780262631334.
Reprinted in Taylor, John B. (1981), "Estimation and control of a macroeconomic model with rational expectations", in Lucas, Jr., Robert E.; Sargent, Thomas J., Rational expectations and econometric practice, Minneapolis: University of Minnesota Press, ISBN 9780816610983.
^ abTaylor, John B. (1993). Macroeconomic policy in a world economy: from econometric design to practical operation. New York: W.W. Norton. ISBN 9780393963168.
^Ben Bernanke refers to the “three concepts named after John that are central to understanding our macroeconomic experience of the past three decades—the Taylor curve, the Taylor rule, and the Taylor principle.” in “Opening Remarks,” Conference on John Taylor’s Contributions to Monetary Theory and Policy
^Judd, Kenneth; Kubler, Felix; Schmedders, Karl (2003), "Computational methods for dynamic equilibria with heterogeneous agents", in Dewatripont, Mathias; Hansen, Lars Peter; Turnovsky, Stephen J., Advances in economics and econometrics theory and applications (volume 3), Cambridge, U.K. New York: Cambridge University Press, p. 247, ISBN 9781280163388 and “Eviews Users Guide II.”
^King, Robert G.; Wolman, Alexander (1999), "What should the monetary authority do when prices are sticky?", in Taylor, John B., Monetary policy rules, Chicago: University of Chicago Press, ISBN 9780226791265.
^Taylor, John B. (1999), "Staggered price and wage setting in macroeconomics", in Taylor, John B.; Woodford, Michael, Handbook of macroeconomics, Amsterdam New York: North-Holland Elsevier, pp. 1009–50, ISBN 9780444501585.
^Taylor, John B. (April 1968). Fiscal and monetary stabilization policies in a model of endogenous cyclical growth (BA thesis). Princeton University.
^Taylor, John B. (2008), "Housing and monetary policy", in Reserve Bank of Kansas City, Housing, housing finance, and monetary policy: a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 30-September 1, 2007, Kansas City, Missouri: Reserve Bank of Kansas City, pp. 463–76, OCLC170267547
^Taylor, John B. (2009), "The financial crisis and the policy response: an empirical analysis of what went wrong (housing and monetary policy)", in Bank of Canada Staff, Festschrift in honour of David Dodge's contributions to Canadian public policy: proceedings of a conference held by the Bank of Canada, November, 2008, Ottawa: Bank of Canada, pp. 1–18, ISBN 9780660199276.
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