This study examines the usefulness of the Taylor-rule framework as an organizing
device for describing the policy debate and evolution of monetary policy in the United
States. Monetary policy during the 1920s and since the 1951 Treasury-Federal Reserve
Accord can be broadly interpreted in terms of this framework with rather surprising
consistency. In broad terms, during these periods policy has been generally formulated
in a forward-looking manner with price stability and economic stability serving as
implicit or explicit guides. As early as the 1920s, measures of real economic activity
relative to “normal” or “potential” supply appear to have
influenced policy analysis and deliberations. Confidence in such measures as guides
for activist monetary policy proved counterproductive at times, resulting in excessive
activism, such as during the Great Inflation and at the brink of the Great Depression.
Policy during the past two decades is broadly consistent with natural growth targeting
variants of the Taylor rule that exhibit less activism.
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