Short Course on Policy Rules–Including Yellen’s Variant

In a recent interesting article, “The Yellen Fed? Precise and Predictable,” Catherine Rampell assesses Janet Yellen along the discretion/rules-based dimension rather than the hawk/dove dimension which so many others have focused on. Quoting several people, including me, the article suggests that Janet Yellen tends to lean toward rules in the rules/discretion balance.  That’s my view too, at least compared to the current chair Ben Bernanke and Janet’s one-time rival for the chair, Larry Summers.  By way of explaining my view to readers  the article added that Taylor “devotes a graduate course lecture to weighing his preferred interest-rate-setting rule against a variant Ms. Yellen has described.”

Several people have asked me about that course and the lecture.  It’s a course in Monetary Theory and Policy designed for PhD students at Stanford usually offered in the spring term of their first year. I taught the course last spring, and I’ve been teaching a version of the course for many years, updated to include current research and policy when possible. Here is the syllabus, which gives the objectives of the course and some background readings, along with a list of links to the slides for the lectures.

Syllabus Lecture slides: 1. Background and Policy Motivation 2. Observing Monetary Phenomena 3. Impact of Monetary Shocks: Closed Economy 4. Impact of Monetary Shocks Open Economies 5. The Lucas Critique and Monetary Policy 6. Time Inconsistency and Monetary Policy 7. Staggered Pricing in Macro 8. Staggered Pricing More Micro 9. Simple Rules for Monetary Policy 10. Monetary Policy Rules Cross Checking 11. International Monetary Considerations 12. Monetary Policy Rules Robustness 13. Term Structure of Interest Rates 14. Monetary Policy and Term Structure 15. Which Rule 16. Wrap Up

The course is pretty technical—after all it is a PhD course—which uses multivariate time series techniques and dynamic stochastic models with (1) forward looking agents who have rational expectations and (2) sticky or staggered price-wage setting—the two essential ingredients of models used to evaluate monetary policy rules. The course introduces and uses these models mainly to evaluate policy rules—which is what they were originally designed for—rather  than to evaluate discretionary policy, and this brings us to Janet Yellen.

Lecture 15 on “Which Rule” is the lecture that Catherine Rampell referred to in her article.  Of course, it was given before Janet Yellen was nominated to be Chair of the Fed. The lecture is set up like a “compare and contrast two things” exam question where the two things are (1) the Taylor rule and (2) Yellen’s variant on the Taylor rule (described in Janet’s April 2012 paper which is the first item on the reading list).  See also slides 2 and 5. As in any good answer to an exam question, the lecture uses the methods taught in the course to do the comparison.  I make the case for Rule 1, but the point of the lecture is that it is possible to do such a comparison at a level of rigor expected of graduate students because Yellen has transparently laid out Rule 2 in her communications. As stated on the last slide: “Of course one could argue the other side and, if argued well, get a good grade!”

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