Limits of Short-Run Stabilization Policy

The tradition in which many of us were raised is that policymakers should adjust policy actions based on forecasts of the future path of the economy and their best judgments. While some have become increasingly skeptical about our ability to forecast and some have long favored policy rules, here, as elsewhere, traditions die slowly. Policy in the United States and in many other countries continues to be guided by policymakers' beliefs about the future, and their beliefs are often based on some type of forecast. The reader of the financial press frequently finds statements by economists and others linking forecasts to discretionary policy actions. Some recent examples comment on the current state of the economy.