BPEA | Fall 2007

Monetary Policy Models

Fall 2007

I HAVE WRITTEN SEVERAL Brookings Papers looking at the relation of
multiple-equation economic models to the process of monetary policymaking. When the first of these papers was written, the impact of the
rational expectations critique in undermining academic interest in quantitative
modeling for monetary policy was apparent. Many, maybe most,
economists took the Lucas critique to imply that the month-to-month business
of choosing monetary policy actions in the light of current information
was trivial or irrelevant. Economists were thought to have nothing
useful to say about it. They were supposed to contemplate only the choice
of policy “rules,” which were modeled as functions mapping the state of
the economy into policy actions.