2 - Learning and Policy Ambiguity

Summary

The Fed does not possess a systematic procedure for acquiring knowledge about the working of monetary policy and for communicating such knowledge to the public. In this chapter, I argue that to learn and communicate in a systematic manner the Fed must use the language of economics to engage in a dialogue with the academic community over the interpretation of monetary history.

Disagreement over the Nature of Monetary Policy

Disagreement arises over whether the Fed must choose between stabilizing unemployment and stabilizing prices. In the 1960s, the question was whether achievement of low unemployment required acceptance of inflation (Samuelson and Solow 1960). In the 1980s, when the Fed's primary objective changed from low, stable unemployment to low, stable inflation, the question became whether stability in prices required variability in unemployment (Modigliani and Papademos 1975). For those who answered affirmatively, the empirical correlations of the Phillips curve promised a quantitative answer.

The fundamental disagreement comes from differing views over the nature of price-level determination. Is there a hard-wired (intrinsic) persistence to actual and expected inflation that exists independently of monetary policy? Alternatively, does the behavior of actual and expected inflation derive from the systematic part of monetary policy – the rational expectations assumption? The attempt here is to provide relevant evidence by using different monetary policies over the twentieth century as experiments yielding outcomes useful for testing hypotheses.