Not all monetary policy-makers are economists; not all can access work such as Phillips' Proportional Integral Derivative compression system (although all can access the Phillips Critique, named after Lucas). John Taylor (trained by Phil Howrey in the Phillips stabilisation tradition) describes and prescribes compression in a manner accessible to those who deal with domineering personalities, such as Alan Greenspan. 

Vulnerability led Greenspan (2008, 51-53) to seek stabilisation through "converting" with "fervor" to an "unfettered" no-dissent, tobacco-is-compulsory, "Collective" run by a science-fiction writer who deprived him of sleep and trained him to be a medieval logician. In Greenspan's Aristotelian universe there was no "flaw", no "bubble", just epicycle "froth". 

In reality, by mid-2005 it was clear that the "speculative bubble" in the US housing market was going to "burst" and be followed by "a synchronized downturn in many affected countries ... financial and economic meltdowns" (Leeson, R. 2005. Assessing the effect of taxes on the economy: deflate housing bubble with targeted taxes. San Francisco Chronicle 19 August. http://www.sfgate.com/default/article/Assessing-the-Effect-of-Taxes-on-the-Economy-2646541.php)

In 2006, work began on *The Taylor Rule and Transformation of Monetary Policy* when it became clear that, as Greenspan later put it, the monetary policy authorities were "waiting" for the Great Recession "to happen". 

The editors have subsidized the price (by forgoing royalties).        
  
----- Original Message -----
From: "Richard Lipsey" <[log in to unmask]>
To: [log in to unmask]
Sent: Thursday, 1 May, 2014 8:24:00 AM
Subject: Re: [SHOE] Phillips and Taylor

I am not sure I want to get involved in an extended discussion of this matter at this time as I have very pressing publisher's deadlines to meet. BUT in standard Keynesian theory of the time that Bill and I wrote the "PHILLIPS CURVE" papers, the causal sequence went from output to inputs costs to output prices, not vice versa as in many classical models. A rise in demand caused output to rise and if the economy was at or near full employment, this caused inputs prices to rise, notably wages (which at the time were a much larger proportion of total  costs than they are now) these higher costs were then passed on to firms which were full cost pricers. This sequence is clear in much early Keynesian  writing.

The interpretation of the Phillips curve as an aggregate supply curve came much later and from others.  Bill and I, and most others at the time, saw it is an adjustment mechanism as earlier spelled out in the Swedish literature whereby the rate at which prices adjusted (wages in this case) were a function of the size of the excess demand in the relevant market.
  
I have outlined what we understood to be the Keynesian micro underpinnings of the macro model that behaved as above in my article: “IS-LM, Keynesianism and the New Classicism”, in Macroeconomics and the Real World, Volume 2: Keynesian Economics, Unemployment, and Policy, Roger E. Backhouse and Andrea Salanti (eds.), (Oxford: Oxford University Press), 2000, 57-82

Richard Lipsey

-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of [log in to unmask]
Sent: April-29-14 9:58 AM
To: [log in to unmask]
Subject: [SHOE] Phillips and Taylor


[Roy, remember you have a delete button ready at hand.]


Strapped as I  am with only the internet, the library of a small provincial university, and  the Society's e-mailed conversations, I try to satisfy my curiosity about the history of an idea that appears in different forms in different policy circumstances.

On the one hand I have a book review on the web stating "... there is also the idea of the Taylor Curve ... .  The diagram has a vertical axis that denotes the variance of output.  The variance of inflation is shown on the horizontal axis."
On the other hand I have Lipsey's  two versions of the Philips curve (Blaug and Lloyd, Famous Figures and Diagrams in Economics, p. 378.  Lipsey's second diagram has the rate of inflation on the vertical axis and (at least implicitly) the rate of increase in real output on the horizontal axis.

By putting output on the horizontal axis it would seem that Lipsey intended output to be the independent variable, but that is not the case.  He interprets this Phillips curve to be an aggregate supply curve in which rising prices cause the increase in output.  There seems to be no reason for not drawing the diagram with the increase in prices on the horizontal axis as does Taylor.

So, what to make of this?  Taylor suggests adjusting the interest rate to counter act variance in the rate of inflation and the rate of increase in real output.  In short, he is suggesting the use of monetary policy to generate a stable and muted trade off between inflation and unemployment (output).  He is  suggesting a means of taking inflation expectations out of the Phillips curve.   How to achieve the Great Moderation.

Needless to say, there is much more that can be made of this.

Robin Neill