Historical monetary policy analysis and the Taylor rule

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 forwardlooking 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 naturalgrowth targeting variants of the Taylor rule that exhibit less activism. JEL Classification System: E3, E5, B2 Correspondence: Federal Reserve Board, Washington, D.C. 20551, Tel.: (202) 452-2654, e-mail: [email protected]. ∗Prepared for the Carnegie-Rochester Conference on Public Policy on the 10th anniversary of the Taylor rule, Pittsburgh, PA, November 22-23, 2002. I would like to thank Oldrich Dedek, Gregory Hess, William Keech, David Lindsey, Bennett McCallum, Allan Meltzer, William Poole, Richard Porter, Simon van Norden, Anna Schwartz, Jan Qvigstad, as well as participants at the conference and at presentations at Harvard University, George Mason University, the Norges Bank Workshop on Monetary Policy Rules in Inflation Targeting Regimes, and the 2003 meeting of the American Economic Association for helpful discussions and comments. The opinions expressed are those of the author and do not necessarily reflect views of the Board of Governors of the Federal Reserve System.