Keywords: Federal Reserve, policy rule, real-time data.
Abstract: This study examines the usefulness of the Taylor-rule framework as an
organizing device for describing the policy debate and evolution of
monetary policy in the United States. Monetary policy during the 1920s
and since the 1951 Treasury-Federal Reserve Accord can be broadly interpreted
in terms of this framework with rather surprising consistency. In broad terms,
during these periods policy has been generally formulated in a forward-looking
manner with price stability and economic stability serving as implicit or
explicit guides. As early as the 1920s, measures of real economic activity
relative to "normal" or "potential" supply appear to have influenced
policy analysis and deliberations. Confidence in such measures as guides
for activist monetary policy proved counterproductive at times, resulting in
excessive activism, such as during the Great Inflation and at the brink of
the Great Depression. Policy during the past two decades is broadly
consistent with natural-growth targeting variants of the Taylor rule that
exhibit less activism.
Full paper (330 KB PDF)
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Last update: August 12, 2003