, yet bank lending has responded little. with very large non - performing loans of indeterminate value, the size of capital in japanese banks is difficult to judge. the periodic eruption of the so - called japanese funding premium in recent years attests to the broad degree of uncertainty of the viability of individual banks. this understandably creates considerable caution on the part of japanese bank loan officers in committing scarce bank capital. but unlike the united states and sweden a decade ago, alternate sources of finance are not yet readily available. the swedish case, in contrast to america ’ s savings and loan crisis of the 1980s and japan ’ s current banking crisis, also illustrates another factor that often comes into play with banking sector problems : speedy resolution is good, whereas delay can significantly increase the fiscal and economic costs of a crisis. resolving a banking - sector crisis often involves government outlays because of implicit or explicit government safety net guarantees for banks. accordingly, the political difficulty in raising taxpayer funds has often encouraged governments to procrastinate and delay resolution, as we saw during our savings and loan crisis. delay, of course, can add to the fiscal costs and prolong a credit crunch. the annals of the united states and others over the past several decades tell us that alternatives within an economy for the process of financial intermediation can protect that economy when one of those financial sectors experiences a shock. but the mere existence of a diversified financial system may well insulate all aspects of a financial system from breakdown. australia serves as an interesting test case in the most recent asian financial turmoil. despite its close trade and financial ties to asia, the australian economy exhibited few signs of contagion from contiguous economies, arguably because australia already had well - developed capital markets as well as a sturdy banking system. but going further, it is plausible that the dividends of financial diversity extend to more normal times as well. it is not surprising that banking systems emerge as the first financial intermediary in market economies as economic integration intensifies. banks can marshal scarce information about the creditworthiness of the borrower to guide decisions about the allocation of capital. the addition of distinct capital markets outside of banking systems is possible only if scarce real resources are devoted to building a financial infrastructure. it is a laborious process whose payoff is often experienced only decades later. it is thus difficult to initiate, especially in emerging economies that are struggling to edge above the poverty level. they perceive the need to concentrate on high short -

, in the presence of aggregate supply shocks, attempts by monetary policymakers to reduce the volatility of inflation over time could be associated with higher volatility in unemployment, and vice versa. john's visual depiction of this policy tradeoff has come to be known as the taylor curve. interestingly, john's work anticipated the possibility that improvements in the conduct of monetary policy or changes in the structure of the economy could result in a shift of the taylor curve - - that is, a change in the ability of policy to smooth both inflation and employment. and indeed, what economists have dubbed the great moderation - - a simultaneous reduction in the volatility of inflation and the volatility of real economic activity - has occurred in the united states and in many other economies over the past quartercentury. over the course of the 1980s, john continued his work on rational expectations issues and monetary policy and macroeconomics more generally. he also began to broaden his focus to matters of international economics. he developed a multi - country rational expectations econometric model - - a truly ambitious undertaking, especially in light of the limited computing capabilities of the era. by this point in his career, john had firmly established his reputation as a leader in the profession. in 1989, john became a member of the first president bush's council of economic advisers. during the next four years, he played a key role in shaping the administration's positions on macroeconomic, fiscal, international finance, and trade issues. the u. s. economy was entering a difficult period at that point. among other problems, significant pressures on bank balance sheets were beginning to emerge that would damp economic growth for the next several years. while dealing with the serious economic issues of the time, john and the other members of the council simultaneously produced an impressive manifesto for policymaking. they developed a rules - based approach to the conduct of monetary and fiscal policy and published it in 1990 in the economic report of the president. that essay laid the foundation for what is perhaps john's most well - known contribution to economics - - the simple description of the determinants of monetary policy that eventually became known as the taylor rule. 1 john's analysis triggered an avalanche of studies examining the stabilization properties of taylor rules in the context of macroeconomic models. other work investigated the ability of variants of the taylor rule to describe empirically the actual course of monetary policy in the united states and in other economies. the taylor rule also