Rules, and the Greenspan-Bernanke Years

R ecent research has highlighted several aspects of monetary policy un-der Chairman Alan Greenspan, noting that the Federal Reserve wasforward looking, smoothed interest rates, and focused on core infla-tion.1 Some analysts have estimated Taylor rules that incorporate these salient features of monetary policy, and have shown that monetary policy actions taken by the Federal Reserve in the Greenspan era can broadly be explained by these estimated Taylor rules. Using a core measure of consumer price infla-tion (CPI), Blinder and Reis (2005) estimate a Taylor rule over 1987:1–2005:1, showing that the estimated policy rule tracks actual policy actions fairly well. Using Greenbook forecasts of core CPI inflation, Mehra and Minton (2007) estimate a forecast-based Taylor rule that shows this estimated policy rule also fits the data over 1987:1–2000:4.2 More recently however, Taylor (2007, 2009) has argued that monetary policy was “too loose ” during most of the period from 2002–2006, in the sense that the actual federal funds rate was too low relative to the level simulated by a smoothed version of the original Taylor rule.3 In this simulation exercise, Taylor (2007) assumes response coefficients Mehra is a senior economist and policy advisor at the Federal Reserve Bank of Richmond