A Policy Rule Presented at a Conference 25 Years Ago Today

Ed Nelson sent me a nice note today saying that the past two days (November 20-21) mark “the twenty-fifth anniversary of the Carnegie-Rochester Conference at which you laid out your rule.” I had forgotten about the specific dates, but his note reminds me how much has changed in those 25 years.

Back then, research on monetary policy rules was indicating that rules needed to be very complex with many variables and many lags. There were serious doubts about the usefulness of the research, and some expressed doubts that the results would ever be applied in practice. I had been conducting research at Stanford in the 1980s with a number of graduate students including Volker Wieland and John Williams. So Allan Meltzer (who organized the Conference Series with Karl Brunner) called me and requested that I present a paper on the subject at the November 1992 conference.

The question was: Could we design a simple practical policy rule that was consistent with our research? The answer turned out to be yes, with the interest rate—the federal funds rate—rather than the money supply or the monetary base as the instrument.  The Fed still wasn’t talking publicly about its settings for the federal funds rate, so there was criticism of that design. However, several discussions with Alan Greenspan, who was then Chair of the Fed, gave me a degree of confidence that this approach was workable. In fact, Greenspan later joked that the Fed deserved an “assist” in the developing the Taylor rule.

Ben McCallum was the discussant of my paper at the conference, and he recently wrote a retrospective on the impact of the conference and the rule.  Ben describes how the request to me from Allan Meltzer originated in a meeting of the Carnegie-Rochester Advisory Board on which Ben served.  Ben’s recollection of what Allan was supposed to ask me to do was quite different from what I recall Allan actually asked me to do.  We will perhaps never know how that interesting “miscommunication” arose, but it clearly made a difference.

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