Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Let me answer your question in a slightly different way than Glenn did. I interpret your question as saying suppose private-sector agents don’t understand the rule or, even more generally, the model. In that case you might ask if there is a role that the Fed can play in the conduct of monetary policy that will assist private-sector agents in learning that rule over a shorter period of time or getting to the right equilibrium. As you know, Jim Bullard at the Federal Reserve Bank of St. Louis works on this. There is a small and growing literature on the subject of learnability, and that literature does say that some inertia in policy is beneficial in helping private-sector agents learn the rule and come to the rational expectations equilibrium. I’m sympathetic to that view myself, but I don’t know how much weight to put on it because I don’t think it has been tested in a broad enough set of models to know whether that view is universally correct. At this point, all the experiments that have been conducted have been done on extremely simple models that have no inherent persistence other than in the policy rule; they are models that jump instantaneously in response to shocks at all points in time. I have a suspicion that in a model that has intrinsic lags—so that shocks, regardless of the policy, take some time to play out—it might not be as important to have that persistence in the rule. But I can’t really say that I know the answer.

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