Should the Fed Be Constrained?

13 Pages Posted: 6 Feb 2019

See all articles by Jeffrey Frankel

Jeffrey Frankel

Harvard University - Harvard Kennedy School (HKS)

Date Written: December 30, 2018


Two distinct questions are of interest.

(1) To what extent should the central bank be constrained, versus being allowed full discretion?

(2) To whatever extent it is constrained by a rule, what should that rule be?

With respect to the second question, a good argument for Nominal GDP targeting is that it is robust with respect to supply shocks, whereas CPI targets, for example, are vulnerable to them. But with respect to the first question, I am increasingly convinced that the constraint – whether a NGDP target or something else – must be very loose. Even the most sincere of central bankers will often fail to hit their targets, due to unforeseen shocks. I therefore propose only a mild innovation: the FOMC could include nominal GDP in its Summary of Economic Projections. I also offer a final thought regarding a different kind of constraint: if Fed independence from political influence is compromised, monetary policy will likely become more pro-cyclical.

Suggested Citation

Frankel, Jeffrey, Should the Fed Be Constrained? (December 30, 2018). Cato Journal, Forthcoming; HKS Working Paper No. RWP19-003. Available at SSRN: or

Jeffrey Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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