Monetary Policy Rules: From Adam Smith to John Taylor

Abstract

We describe, through the lenses of history, the intellectual origins of the Taylor rule. The Taylor rule was an important component of the transformation that swept through the monetary policy landascape in a remarkable few years following the abandonment of monetary targeting. In this long paper we provide an original overview of the long-dated debate on rules vs discretion in monetary policy, ever since Adam Smith and the monetary controversies of the XIX century. We then analyse in greater detail the debates in the interwar years (Wicksell, Keynes, Cassel, Simons, Fisher) and the debates in the 1950s and 1960s (Phillips, Friedman, the rational expectation hipothesis) and how these debates came to influence the elaboration of the Taylor rule.