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Macroeconomic Policy Lessons from the Financial Crisis

Read the article "Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis" (which can be found at https://research.stlouisfed.org/publications/review/10/05/Taylor.pdf) and answer the following questions:

a. What was the Great Moderation? When did it begin and end? According to Taylor, why did it end?
b. Why does Taylor argue that monetary excesses led to the financial crisis and the Great Recession? What evidence dose he offer to support his claim?
c. What does Taylor think the crisis was misdiagnosed as? Why does he think that the Fed misdiagnosed financial crisis?
d. Why was the Troubled Asset Relief Program (TARP) created? How does Taylor's discussion of TARP support his views that government interventions did a great deal of harm
e. What does Taylor see as the long-term legacies of the monetary and fiscal policy interventions to deal with the financial crisis? What does he recommend for getting monetary policy back on track

Source: ' Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis John B. Taylor, review, Federal Reserve Bank of St. Louis, May/June 2010, 165-76

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1. What was the Great Moderation? When did it begin and end? According to Taylor, why did it end?

The Great Motivation is a period (two or more decades) of less volatility in the growth rate of real GDP. It is characterized with long expansions, short recessions, and low inflation. It began when the great volatility ended in the early 1980s. According to the article, some economists say it may have begun in 1984 or at the start of expansion in 1982. It finally ended because of the recent financial crisis.

The Great Moderation ended because of a Great Deviation, in which economic policy deviated from what was working well during the Great Moderation. Compared with the Great Moderation, policy became more interventionist, less rules-based, and less predictable. When policy deviated from what was working well, economic performance deteriorated.

2. Why does Taylor argue that monetary excesses led to the financial crisis and the Great Recession? What evidence dose he offer to support his claim?

One of the monetary tools implemented as a discretionary intervention by the government was low interest rates on loan. This resulted to monetary excesses because this encouraged high borrowings. This led to a financial crisis because the low interest rates added fuel to the housing boom, which in ...

Solution Summary

This solution provides assistance with the questions attached regarding the article, "Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis" by John B. Taylor.

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