It's sort of, 1987 is actually, when I got this job here. for 25 years, 26 years, I've been watching that evolution, and it came right before the crisis to a consensus, okay? Among all economists, pretty much, okay? That the right thing, that what the Fed was doing, and what the Fed should be doing with something called the Taylor Rule, okay? that it should be moving the Fed Funds Rate in accordance with an equation of the following form. And let me just copy it so that I don't, so that I get it on the board the same way it is in the notes. Rho, R equals rho, plus pi e. I'll tell you what all these things are plus alpha pi e minus pi star, plus beta, y minus y f, okay? R is, is the target interest rate, so we'll just say that that's the fed function rate there. Row is the natural rate of interest, it's a real rate of interest. The return on real capital goods. Pi e is expected inflation, where inflation as you, as you know from the earlier classes is the change in the price level, in percentage terms. So that might be you know, 1% or 2% sort of now in percentage terms. But in, in 79, it might be 15%, so, be a large number. and then there's, and then there's this error correction term, in a way. In, expected inflation minus inflation target, okay? And output minus full-employment target. That's the target. So there's two terms here, one about prices and one about output. and the, and the notion is that the central bank is, this equation by the way fits. If you, if you run this regression and so you're, you're actually calculating alpha and beta. it fits the behavior of this, of central banks pretty much around the world pretty well. Not in the crisis, okay. But in, in, in, in normal times. So, it's, it's a positive description of what central banks are doing. but then there's a whole literature that grew up to set, to have as normative saying this is what central banks should be doing. to stabilize prices, to stabilize output, to stabilize the economy. And the key idea is this. That this first part of the equation, okay? R equals rho plus pi to the e. This is something called the Fisher Effect. Fisher, who's a professor at, at Yale, and the idea's just that the nominal interest rate is equal to the real interest rate plus, plus expected inflation. and so this is what the markets are doing themselves is the point, okay? But the markets themselves are trying to look ahead and think about what is expected inflation and they're going to try and factor it in To the interest rate they charge. So that if you expect higher inflation it's only fair that, that you that, that creditors get more, get more returns. So the nominal interest rate goes, goes up here. This is the idea. Now when Fisher, whenever Fisher himself was, was positing this, he actually thought people made mistakes about this all the time. And so a lot of fluctuation in the economy, he thought, came from the fact that people made mistakes. They got, they had wrong expectations of inflation. And he thought that he could help them get better expectations of inflation by using the quantity equation and other forecasts of inflation. Modern economics, okay, as you know, is much more optimistic about people's ability to forecast and tends to think of these rational expectations. That this is in fact an unbiased estimate of the actual of the actual and future inflation. and so this, and so the point is this is what the market will do on its own. So the rest of us is saying this is what the Fed going to do in order to correct the market, okay? In order to lean against the wind alpha is greater than one. Okay, so that if expected inflation is greater than the inflation target we raise the nominal interest rate by more than the, more than the difference. You know, to try to really create more discipline in the economy, that's the idea. Or if output is below below full employment, this beta is the sensitivity of monetary policy to that, we low interest rates, okay? If there's, if there's, if unemployment is [INAUDIBLE], okay? We lower interest rates to try to get some more elasticity, okay? So this is, this is, this is an attempt to describe in technical, well in not really that technical, it's just, it's just a linear equation here. the behavior of central banks, and then there's a lot of literature, people make careers on this. about you know, what is the optimal setting of alpha. What's the optimal setting of beta. Maybe we shouldn't even have such a term. Maybe we should have a third term for financial stability. So there's, you can generate dissertations out of this, and many dissertations were generated out of this. I already had my dissertation, by then. And so I didn't write my dissertation on this. But this was the state of the art, and, and it came to be called Inflation Targeting. And it spread all over the world. And and then we had a financial crisis. So the, this was a sort of economics came to believe that somehow we had really mastered the monetary economy, so much that we could like argue. You know, should this be 1.1 or 1.2 or something like that you know, fine details of stabilization, okay? And meanwhile, we didn't have inflation, we had the great moderation and, and, and then, kerwhammy. You know, we've got this financial crisis. So, so the notion that if we just do this, everything's going to be fine, nobody believes this anymore, okay? This can't really be true. There must be more to it than that. And so this sort of dislocation, you can imagine the mental dislocation Gener, a whole generation of, of, of young professors who, you know, mastered all of this and they learned all their kind of metrics, and all of this. And then the crisis comes along and, and it's a little, they're a little destabilized by this, okay? Even, e, e, even now. I was fortunate, as I say, that I, wasn't part of this sort of this sort of program. And I did other things, and I was reading Hawtrey and so forth, and so I was much more prepared for the financial crisis. then, then, and so, and you know, in the land of the blind, the one eyed man is king. And that turned out to be, to be me. if you wait, wait long enough in one place, the world will come right back around to you.