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

Yes. But if you’re responding idiosyncratically to normal shocks so that it doesn’t seem as if you’re acting in a systematic way, that will undermine people’s beliefs that you’re following a committed rule, or rule-like behavior, that anchors their expectations. That is the key here. One thing we didn’t show you in the material we presented is that, if you get to the point Governor Ferguson referred to—where you’ve moved up the curve in exhibit 3 and are near the top of it so that people are more rational—the performance of the economy is much better than if they’re not rational. That’s the first point. The second is that people are also very forgiving of mistakes. If you do behave differently than the policy rule would call for—and people don’t bail on you and say they don’t know what you’re doing now—the policy loss from doing something other than the optimal is very small. If people are rational, they are willing to give you that benefit.

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