Reply to Alan Blinder Redux

Alan Blinder has written another Wall Street Journal article criticizing legislation that would simply require the Fed to describe its rule or strategy for monetary policy.  As with his earlier article, Blinder still “shoots at a straw man of his own making, not at the proposed law itself” as I wrote in another John Taylor’s Reply to Alan Blinder for the Wall Street Journal.

Blinder says the act “would require the Fed to adopt a mechanical rule for monetary policy.”  No, there is nothing mechanical about what is required. The legislation emphasizes that it is the Fed’s job to choose the rule and to describe the rule, and it can do so as it sees fit.

Blinder sounds particularly upset that the legislation, as he puts it, “strongly suggests a rule invented by economist John Taylor of Stanford University.”  While a policy rule invented by me is referred to in the legislation, it is simply put forth as a “reference rule,” not a “required rule,” not a “preferred rule,” and certainly not as a “strongly suggested rule.”

It is hard to find work done on monetary policy rules that does not refer to the Taylor rule in some way. Such references have been made by Fed policymakers and staff for decades, both internally and externally.  Referring to such a rule as a benchmark, as an example, or even as an alternative is standard practice for the Fed, so having the Fed refer to this “reference rule” is by no means a warning to “Depart from the Taylor rule at your peril” as Blinder cutely puts it.

Blinder admits that “As rules go, the Taylor rule is not a bad one. In normal times, it provides a useful benchmark against which monetary policy can be appraised.” He then adds:  “But what about abnormal times? When the economy departs from ‘the rules,’ do we really want the Fed to stick with the Taylor rule out of fear of congressional browbeating?”

But the legislation is explicit that the Fed can depart from its chosen rule; all it needs to do is explain the reasons for the departure.  Such an approach will increase transparency not increase browbeating.

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