The Samuelson Lecture, before the 24th Annual Conference of the Eastern Economic Association, New York, New York

In this speech Governor Gramlich addresses the issues that arise when the question of whether the Federal Reserve Board should use rules in the conduct of monetary policy is contemplated. He tells how the Fed once based policies on monetary aggregates and that now many suggest they base them on the federal funds rate. The Fed currently votes on monetary policy based on the judgement of its members.

There are several different types of policy rules he discusses. The first is an unconditional rule, for example, having monetary authorities increasing the money supply a certain percentage each year or base a rule on some target objective such as rigid prices and reduce the inflation rate to a certain level. Another intermediate approach could be called a feedback rule. Using this approach, policy objectives are specified in the rule and authorities would react in a regular way to the discrepancies between actual values and the target levels of these variables.

Rules also vary in how restricting they are. They can be as extreme as bei

There are also some benefits to rules. One is that policy is clear, regular, and consistent. Rules can help in guiding, both quantitatively and in behavior, when information is conflicting or when there is political pressure. Rules can determine in advance ways to help stabilize the economy and can use complicated lag patterns. They are helpful when authorities are unsure of how to remedy a situation.

In Taylor's rule, the adjustment coefficients are already include stabilizing components. There are indirect properties through the behavior of long term bond markets. The Taylor rule also presumes that monetary policy is independent, that the federal funds rate can vary without having any effect.

There are numerous advantages and disadvantages for rules. A disadvantage of the rules is that they must be oversimplified and authorities do not benefit from them. Also, there are several monetary objectives that conflict with one another. Rules based on one objective may oppose the intentions of another rule. Sometimes rules may not work or work only under certain circumstances.

where PFR is the recommended federal funds rate in nominal terms, r* is the equilibrium funds rate in real terms, p is the actually rate of inflation, y is the deviation of output, and p* is the desired inflation.

Conservative economist Milton Friedman supported the unconditional rule that if the Fed simply increases the money supply by approximately four percent

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