Rules vs. Discretion Revisited: A Proposal to Make the Strategy of Monetary Policy Transparent
53 Pages Posted: 16 Jul 2019
Date Written: June 25, 2019
The movement toward increased transparency on the part of the Federal Open Market Committee (FOMC) has concentrated on additional explicitness about the forecasts of the economy by its individual participants. Especially with the funds rate near its zero lower bound, the FOMC has become more explicit about the funds-rate path it anticipates for the future. However, the FOMC has been much more reticent about articulating a strategy to guide monetary policy (that is, a rule). Without communication in terms of a rule, monetary policy at times becomes a source of instability. The reason is that the FOMC cannot reliably control how markets form their expectations of future policy actions. Moreover, learning is difficult without knowledge of how the underlying strategy of monetary policy has evolved. The recent experience of implementation of policy with a near-zero funds rate also highlights the importance of the management of expectations through a rule-based policy.
Keywords: Federal Reserve System, rules versus discretion, FOMC
JEL Classification: E50
Suggested Citation: Suggested Citation