Author(s)

Vivekanand Jayakumar

Economics Department, University of Tampa, Tampa, FL, USA.

US Congressional leaders have recently proposed legislation aimed at forcing the Federal Reserve to implement an instrument rule based monetary policy regime. The avowed rationale is to increase transparency and reduce uncertainty associated with monetary policymaking, and to impose constraints on the US central bank. The proposed legislation would require the Federal Reserve to adopt an interest rate setting rule, preferably a rule based on the standard Taylor Rule. This article examines the theoretical rationale for considering monetary policy rules and provides a critique of the move to legislate the adoption of interest rate setting rules in the US. Specifically, the challenges that the Federal Reserve would encounter if it were required to follow an instrument rule, and the shortcomings of any monetary regime based on the standard Taylor Rule, are detailed in this study. This article also considers the merits of basing a monetary policy regime on a targeting rule instead of an instrument rule, and argues that US policymakers would be better served if they shift their focus towards establishing a clearly defined nominal GDP targeting rule and abandon their efforts to impose operational constraints on the Federal Reserve.

Monetary Policy, Taylor Rule, Equilibrium Real Interest Rate

Jayakumar, V. (2016) The Legislative Push to Mandate Rules-Based Monetary Policymaking in the US: The Latest Salvo in the Long-Running “Rules versus Discretion” Debate. Theoretical Economics Letters, 6, 1315-1336. doi: 10.4236/tel.2016.66122.