The Problem With “Rules-Based” Monetary Policy

The phrase ‘rules-based monetary policy’ has frequented conservative circles a lot lately. Republican presidential candidate Ted Cruz expressed his deep passion for implementing a monetary policy rule in a handful of presidential debates this year, including both October’s and November’s debates. House Republicans have introduced bills that would require the Federal Reserve to follow a ‘rule.’ Even the conservative intellectual class has waved its flag of approval for these efforts. In February, theHeritage Foundation remarked that a monetary policy rule will ‘greatly improve transparency and predictability,’ a conviction echoed loudly and frequently at the November monetary policy conference hosted by the Cato Institute.
The most cited, respected, and widely-known monetary policy rule today is known as the Taylor Rule. While following this rule may, in some isolated cases, generate marginal improvements to economic data, we need to ask ourselves if we want the economy to progress or to be cured; and we need to ask ourselves if we want an economy that is better overall or better for everyone.
The philosophical reasoning of the Taylor Rule goes as follows: At its best, the Federal Reserve kick-starts the economy with low interest rates, creating maximum employment and growth. At its worst, the central bank stimulates too much economic activity, generating excessive demand, malinvestment, and unemployment.

This post was published at Ludwig von Mises Institute on NOVEMBER 30, 2015.