sector to the real sector whereas in emerging economies, the direction was the reverse – the fault lines spread from the real sector to the financial sector. finally, much of our pressures came from the supply side, not the demand side. for all these reasons and more, the challenges we faced were different and the responses called for from us had to be different. it is important for us as well as the rest of the world to appreciate these differences between advanced and emerging economies. what better person than prof. taylor to look at monetary policy responses from the special perspective of emerging economies? 15. prof. taylor ’ s career has been marked by a seamless back - and - forth between the academia and policymaking, most recently as the u. s. treasury ’ s top official for international affairs. when in academia, he jumps into teaching and research with an abandon that seems uncharacteristic of a washington policymaker. to grab students ’ attention in a class on agricultural supply and demand, he once pranced around the classroom in a california raisin costume to the tune of marvin gaye ’ s “ i heard it through the grapevine. ” 16. having a concept named after oneself is as much a mark of honor in economics as it is in other sciences. by this standard, prof. taylor is among the most honoured macroeconomists of his generation. indeed, concepts bearing his name have become so pervasive that the u. s. federal reserve board chairman ben bernanke once remarked that “ with our appetites whetted by the taylor rule, the [ taylor ] principle, and the [ taylor ] curve, we now look forward to the taylor dictum, the taylor hyperbola, and maybe even the taylor conundrum. ” 17. here in mumbai, and in a more immediate sense, we look forward to the taylor lecture. 18. ladies and gentlemen, i have great pleasure in inviting prof. taylor to deliver the 11th l. k. jha memorial lecture.

the policy interest rate. 8. monetary policy has embraced the taylor rule so firmly that there has been an intense debate in the wake of the crisis on the policy stance of the us fed vis - a - vis the taylor rule. some analysts used the taylor rule to argue that the fed funds rate, even at this historically low level, was not low enough and made out a case for doing a lot more to stimulate the economy. prof. taylor himself weighed in on the issue suggesting that those analysts were not applying his rule correctly. he contended that, quite to the contrary, his measure shows just the opposite : that the fed policy is appropriate, the policy rate cannot remain low for too long, that central bankers are right to be considering withdrawal of their unprecedented monetary stimulus, and that critics who say otherwise are misinterpreting his rule. according to him, the formula is designed to show the best rate for spurring growth without stoking inflation. 9. if the taylor rule is so time tested in prescribing the policy interest rate, it is legitimate to ask what role there is left for central bankers. i do not have a simple answer for this ; perhaps prof. taylor does. i do have a complex and somewhat longish answer and here it is. 10. for my long and complex answer, it is necessary to refer to the interesting debate on whether economics can be a deterministic and exact science like physics. indeed, some people argue that one of the great follies of economics – the reason it often lost direction, if also credibility is because it had pretense to being like physics. i have no intention of getting into that debate, but in the context of the taylor rule, i can ’ t resist the temptation of drawing upon a comparison of economics with physics, if at an altogether different level. 11. sir isaac newton gave us the three laws of motion and the law of gravity. the mathematical formulation of these laws embodies a complete description of the universe. all you need to specify are the initial conditions and using newton ’ s laws, you can calculate the state of the universe for eternity with absolute determinism. this is classical cartesian reductionist framework in its quintessence. people, therefore, asked, if god has decided on the laws and decided on the initial conditions, he has determined the course of the universe for eternity. besides, he gave us newton to let us know of the laws so that we