A Historical Analysis of Monetary Policy Rules

This paper examines several episodes in U.S. monetary history using the framework of an interest rate rule for monetary policy. The main finding is that a monetary policy rule in which the interest rate responds to inflation and real output more aggressively than it did in the 1960s and 1970s, or than during the time of the international gold standard, and more like the late 1980s and 1990s, is a good policy rule. Moreover, if one defines "policy mistakes" as deviations from such a good policy rule, then such mistakes have been associated with either high and prolonged inflation or drawn out periods of low capacity utilization.