Policy Rules and Forward Guidance Following the Covid-19 Recession

Journal of Financial Stability, 2024 [10.1016/j.jfs.2024.101321]

38 Pages Posted: 14 Apr 2022 Last revised: 7 Feb 2024

See all articles by David H. Papell

David H. Papell

University of Houston - Department of Economics

Ruxandra Prodan-Boul

Stanford University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 13, 2024

Abstract

In August 2020, the Federal Open Market Committee adopted a far-reaching Revised Statement on Longer-Run Goals and Monetary Policy Strategy. The framework contains two major changes from the original 2012 statement. First, policy decisions will attempt to mitigate shortfalls, rather than deviations, of employment from its maximum level. Second, the FOMC will implement Flexible Average Inflation Targeting. We show how to modify the rules in the Fed’s Monetary Policy Report to be consistent with the revised statement, how the pattern of falling behind the curve, pivot, and getting back on track in Fed policy during 2021 and 2022 could have been avoided by following inertial rules consistent with either the original or the revised statements, and how current and projected Fed policy for 2023 – 2026 is in accord with the prescriptions from inertial rules.   

Keywords: Policy Rules, Forward Guidance, Federal Reserve Board, Federal Open Market Committee, Federal Funds Rate

JEL Classification: E5, E52, E58

Suggested Citation

Papell, David H. and Prodan-Boul, Ruxandra, Policy Rules and Forward Guidance Following the Covid-19 Recession (June 13, 2024). Journal of Financial Stability, 2024 [10.1016/j.jfs.2024.101321], Available at SSRN: https://ssrn.com/abstract=4083466 or http://dx.doi.org/10.1016/j.jfs.2024.101321

David H. Papell (Contact Author)

University of Houston - Department of Economics ( email )

Houston, TX 77204-5882
United States

Ruxandra Prodan-Boul

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

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