Enhancing FOMC Transparency: Making Implicit Monetary Policy Rules Explicit

Abstract

Building on the implications of modern macroeconomic models with forward-looking actors, Robert Lucas exposited the argument for a rules-based monetary policy. At the same time, he ended his argument with what appears to be a conundrum. The Federal Reserve System ignores the advice of such models and conducts a discretionary monetary policy. This paper explains the conundrum as a disconnect between the actual behavior of the Federal Open Market Committee, which imposes a consistency over time on its behavior, and its communication to the general public, which uses the language of discretion.

Keywords: monetary policy, Federal Open Mar- ket Committee, Milton Friedman, Robert Lucas, Federal Reserve, economic policy, rules-based monetary policy

JEL Classification: H6, H60, E5, E50, E52