Misconceptions Regarding Rules vs. Discretion for Monetary Policy

Shortly after the most recent of the famous annual symposiums at Jackson Hole, sponsored by the Federal Reserve Bank of Kansas City, one of my colleagues asked me if I had seen the New York Times and Wall Street Journal articles on the conference. They seemed newsworthy, he suggested, because of their reports that Alan Greenspan had come out clearly in opposition to the adoption of any monetary policy rule for the Fed.1 I replied that I would certainly look at the articles, adding that Greenspan had explicitly expressed his opposition to rule-based policymaking on at least one previous occasion, probably more.2 Upon reading the two articles, I found that both quoted from the following statement of Greenspan’s: “Some critics have argued that [the Fed’s] approach to policy is too undisciplined—judgmental, seemingly discretionary, and difficult to explain. The Federal Reserve should, some conclude, attempt to be more formal in its operations by tying its actions solely to the prescriptions of a formal policy rule. That any approach along these lines would lead to an improvement in economic performance, however, is highly doubtful” (Greenspan, 2003, p. 4). Comments and panel discussions by Vincent Reinhart, Janet Yellen, Stanley Fischer, and Martin Feldstein mostly lent support to Greenspan’s remarks in this regard, although there are a few reservations implicit in some of their passages.