TITLE:
The Legislative Push to Mandate Rules-Based Monetary Policymaking in the US: The Latest Salvo in the Long-Running “Rules versus Discretion” Debate
AUTHORS:
Vivekanand Jayakumar
KEYWORDS:
Monetary Policy, Taylor Rule, Equilibrium Real Interest Rate
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.6,
December
26,
2016
ABSTRACT: US Congressional leaders have recently proposed legislation aimed at forcing the
Federal Reserve to implement an instrument rule based monetary policy regime. The
avowed rationale is to increase transparency and reduce uncertainty associated with
monetary policymaking, and to impose constraints on the US central bank. The proposed
legislation would require the Federal Reserve to adopt an interest rate setting
rule, preferably a rule based on the standard Taylor Rule. This article examines the
theoretical rationale for considering monetary policy rules and provides a critique of
the move to legislate the adoption of interest rate setting rules in the US. Specifically,
the challenges that the Federal Reserve would encounter if it were required to follow
an instrument rule, and the shortcomings of any monetary regime based on the
standard Taylor Rule, are detailed in this study. This article also considers the merits
of basing a monetary policy regime on a targeting rule instead of an instrument rule,
and argues that US policymakers would be better served if they shift their focus towards
establishing a clearly defined nominal GDP targeting rule and abandon their
efforts to impose operational constraints on the Federal Reserve.