Saturday , November 2 2024
Home / Dirk Niepelt / Arguments Against Strict Monetary Policy Rules

Arguments Against Strict Monetary Policy Rules

Summary:
In its July 2017 Monetary Policy Report, the Board of Governors of the Federal Reserve System discusses monetary policy rules. On pp. 36–38, the Board argues that [t]he small number of variables involved in policy rules makes them easy to use. However, the U.S. economy is highly complex, and these rules, by their very nature, do not capture that complexity. … Another issue related to the implementation of rules involves the measurement of the variables that drive the prescriptions generated by the rules. For example, there are many measures of inflation, and they do not always move together or by the same amount. … In addition, both the level of the neutral real interest rate in the longer run and the level of the unemployment rate that is sustainable in the longer run are difficult to

Topics:
Dirk Niepelt considers the following as important: , , , , , , ,

This could be interesting, too:

Marc Chandler writes FX Becalmed Ahead of the Weekend and Next Week’s Big Events

Marc Chandler writes Continued Backing Up of US Rates Extend the Greenback’s Gains

Marc Chandler writes Soft US Headline CPI is Unlikely to Be Sufficient to Reanimate Expectations of another Large Fed Cut

Marc Chandler writes US Rates Extend Gains to Fray 4 percent

In its July 2017 Monetary Policy Report, the Board of Governors of the Federal Reserve System discusses monetary policy rules. On pp. 36–38, the Board argues that

[t]he small number of variables involved in policy rules makes them easy to use. However, the U.S. economy is highly complex, and these rules, by their very nature, do not capture that complexity. …

Another issue related to the implementation of rules involves the measurement of the variables that drive the prescriptions generated by the rules. For example, there are many measures of inflation, and they do not always move together or by the same amount. …

In addition, both the level of the neutral real interest rate in the longer run and the level of the unemployment rate that is sustainable in the longer run are difficult to estimate precisely, and estimates made in real time may differ substantially from estimates made later on …

Furthermore, the prescribed responsiveness of the federal funds rate to its determinants differs across policy rules. …

Finally, monetary policy rules do not take account of broader risk considerations. … asymmetric risk has, in recent years, provided a sound rationale for following a more gradual path of rate increases than that prescribed by policy rules.

Dirk Niepelt
Dirk Niepelt is Director of the Study Center Gerzensee and Professor at the University of Bern. A research fellow at the Centre for Economic Policy Research (CEPR, London), CESifo (Munich) research network member and member of the macroeconomic committee of the Verein für Socialpolitik, he served on the board of the Swiss Society of Economics and Statistics and was an invited professor at the University of Lausanne as well as a visiting professor at the Institute for International Economic Studies (IIES) at Stockholm University.

Leave a Reply

Your email address will not be published. Required fields are marked *