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: Commitment, Federal Reserve, Information, Monetary policy rule, Notes, Policy rule, Taylor Rule, Transparency
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.