For many years, going back to the days before Google and Google Scholar helped us find and keep track of things, I created a monetary policy rule home page with links to papers, articles and speeches on policy rules, including a written version of a 1996 speech by Janet Yellen on the Taylor rule.
Janet Yellen’s speech is one of the clearest, most sensible, and most supportive analyses ever written about the Taylor rule. I strongly recommend reading it, especially pages 4 to 11, in light of the recent congressional interest in policy rules. She describes the rule, and then she carefully discusses “several desirable features” it has “as a general strategy for conducting monetary policy.”
She says that “the framework of a Taylor-type rule could help the Federal Reserve communicate to the public the rationale behind policy moves, and how those moves are consistent with its objectives.” She mentions that she is “certainly not proposing the mechanical use of the Taylor rule.” And she adds correctly that “Nor would Taylor himself.” She indicates that more work should be done to improve on such rules, and that in certain circumstances, which she describes, there could be deviations from the rule.
So one cannot help but be amazed by the exchange of views on the Taylor rule or rules in general between Janet Yellen and Richard Shelby, Chair of the Senate Banking Committee on Tuesday, and between her and Jeb Hensarling, Chair of the House Financial Services Committee on Wednesday. In many respects, her speech makes the case for using monetary policy rules in the way that is called for by the policy rules bill that Shelby and Hensarling were asking her about and she seemed to be objecting to. Some observers indicated that they seemed to be talking past each other. But at the least there should be some common grounds for agreement that could form the basis for progress going forward.