The Scientific Approach to Monetary Rules

Nick Timiraos reported in the July 7, 2017 Wall Street Journal article shown above:

The Federal Reserve defended having the flexibility to set interest rates without new scrutiny from Capitol Hill in its semiannual report to Congress on Friday, warning of potential hazards if it were required to adopt a rule to guide monetary policy.

I think there is another approach that the Fed could take to a stress on monetary policy rules by Congress. Here is what I wrote in my new paper "Next Generation Monetary Policy," in the Journal of Macroeconomics:

Because optimal monetary policy is still a work in progress, legislation that tied monetary policy to a specific rule would be a bad idea. But legislation requiring a central bank to choose some rule and to explain actions that deviate from that rule could be useful. To be precise, being required to choose a rule and explain deviations from it would be very helpful if the central bank did not hesitate to depart from the rule. In such an approach, the emphasis is on the central bank explaining its actions. The point is not to directly constrain policy, but to force the central bank to approach monetary policy scientifically by noticing when it is departing from the rule it set itself and why.

I earnestly hope that any of you interested in monetary policy will read "Next Generation Monetary Policy." It distills all of my thoughts about monetary policy aside from my thoughts about negative interest rate policy (for which you should read the papers linked in my bibliographic post "How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide"), relating them where appropriate to the potential for negative interest rate policy. To whet your appetite, here is the abstract:

Abstract: This paper argues there is still a great deal of room for improvement in monetary policy. Sticking to interest rate rules, potential improvements include (1) eliminating any effective lower bound on interest rates, (2) tripling the coefficients in the Taylor rule, (3) reducing the penalty for changing directions, (4) reducing interest rate smoothing, (5) more attention to the output gap relative to the inflation gap, (6) more attention to durables prices, (7) mechanically adjusting for risk premia, (8) strengthening macroprudential measures to reduce the financial stability burden on interest rate policy, (9) providing more of a nominal anchor.