Reflections on Allan H. Meltzer's Contributions to Monetary Economics and Public Policy by David Beckworth

Author:David Beckworth
Language: eng
Format: epub
Publisher: George Mason University - Mercatus Center

TWO INDICATIONS OF MONETARY POLICY QUALITY

How can we decide whether there are additional gains that would accrue to the US economy via monetary policy makers more explicitly adopting a Taylor-type policy rule? Much has been written on this issue. Some of the issues addressed in the literature include the idea that the Taylor-type policy rule is a more model-dependent object and that its policy prescriptions will be valid only in certain model environments. A very real issue, therefore, is the substantial model uncertainty that characterizes today’s policy landscape. But instead of rehashing these arguments, I wish to go in a different direction in the remainder of this chapter.1

I want to turn now to make an assessment about whether inflation targeting, as implemented implicitly in the United States since 1995 (and explicitly since 2012), has led US policy makers to adopt something we can view as close to optimal monetary policy. If recent monetary policy can be viewed as close to optimal, then attempts to further pin down expectations of future policy actions may be less desirable. If recent monetary policy is viewed as less close to optimal, then further monetary policy commitment may confer important benefits on the economy.

I will proceed by considering two examples. In these examples, the evidence about whether recent monetary policy is close to optimal is somewhat mixed, so the results here are broadly inconclusive. Nevertheless, it is instructive to work through these examples.

To make an assessment of this type requires a model. Since there are many models to choose from, we could simply stop here and say we do not know. But in the spirit of trying to understand a little more about the effects of inflation targeting, I will use a very simple version of a New Keynesian model. See the appendix for details about the ideas behind this model.

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