The intellectual weakness of much recent thinking on monetary policy is very disappointing. Actually, to call it “recent” thinking is a distortion. The debate seems stuck somewhere around 1996. Here’s John Taylor complaining about “post-panic” monetary policy at a Congressional hearing in March:
In many ways this whole period can be characterized as a deviation from the more rule- like, systematic, predictable, strategic and limited monetary policy that worked well in the 1980s and 1990s.
It’s as if the last ten years just went down the memory hole as an unfortunate aberration from elegant theory. He just doesn’t seem to occur to Taylor that the consequence of those policies was also massive asset bubbles, volatility and ultimately the most catastrophic financial crisis in seventy years.
That’s because the supposed benefits of policy rules come from oversimplifying the task that policymakers face. There may be a case for comparing policy decisions to a rule, but it elides into pretending that a policy rule can replace policy.
I don’t necessarily hold with the various unconventional monetary policy options that have been used since 2008, or believe that they were as effective as the Fed sometimes claims. However, policymakers had to improvise because nothing else worked. And they at least deserve some credit for that.
At best, the rules school can lead to an appropriate restraint about what policy can achieve. Give policymakers one simple thing to do and maybe they will at least achieve that. But it achieves that simplification by ignoring the interconnections and complexity of the actual economy.
This is much more than the usual discretion versus rules/ time consistency debate. If I had to summarize it in a sentence, I’d say look for balances, not principles or fixed goals.