National and International Monetary Reform
Published: May 29, 2018
Recent deviations from sound, rules-based monetary policy have led to an uneven economic recovery. The Federal Reserve should return to a rules-based monetary policy in order to promote economic growth and stability. Internationally, central banks should consider adopting rules to avoid interfering with free and open markets.
- Why did the Fed move away from a rules-based strategy?
- How would other countries benefit from rules-based strategy?
- Read John Taylor's chapter "National And International Monetary Reform" in Blueprint for America.
- Click here to find the rest of Blueprint for America.
- Read Rules for International Monetary Stability: Past, Present, and Future by Michael D. Bordo and John B. Taylor, available here.
Sound, rules-based monetary policy and good economic performance go hand in hand.
But for the past decade, the Federal Reserve has operated without a consistent strategy. This is not the first time the Fed has moved away from a rules-based strategy. In the 1970s, the central bank adopted a highly discretionary monetary policy. Money growth would go up, then down.
With so much uncertainty, businesses and workers suffered. High unemployment and inflation became the norm. The economy stagnated.
Something had to change. In the 1980s, the Fed gave up on discretionary policymaking and adopted more rules-based policies. Inflation fell, employment rose, and the economy grew. What we need now is a return to the rules-based policies of the 1980s and the 1990s.
One idea is to enact legislation requiring the Federal Reserve to choose a strategy, describe it, and stick with it in all but extreme circumstances.
The strategy would not require a mechanical rule. Instead, it would provide flexibility for the central bank to adjust to economic developments, but in a systematic and predictable way.
The U.S. could foster even more global stability and economic growth by forging an agreement with other countries to commit to a rules-based monetary strategy. Countries could still choose their own independent monetary strategy, but the common goal would be to avoid interfering with the principles of free and open markets.
Having the Federal Reserve commit to a rule-based strategy would create a more transparent and predictable process. Businesses, families, and workers could then make long-term economic decisions without worrying about what the central bank might do in the future.