That abundant liquidity worldwide has played a part is confirmed by our estimates, which indicate that the fall in real interest rates since last summer may explain about a quarter of the subsequent rise in world crude oil prices. This not only puts pressure on current and expected inflation, it also poses a threat to world growth itself.
One approach used by many who have addressed this question is to compare Federal Reserve policies during this period to the recommendations derived from simple policy rules, such as the so-called Taylor rule, developed by John Taylor of Stanford University (Taylor, 1993). This approach is subject to a number of limitations, which are important to keep in mind.