The Journal of Money Credit and Banking Lecture1

Lecture.2 He began by reiterating that “the long-run objective of monetary policy must be price stability ” and then focused on what he called the “fundamental issue…Rules versus Authorities….Should the tactics ” for setting the instruments of monetary policy, he asked, “be determined by relatively mechanical rules that are publicly promulgated, or by the discretion of authorizes instructed to follow the right policy at the right time for the right objective? ” By empirically examining monetary policy during the seven decades from the founding of the Fed until around the time of his lecture, Friedman concluded that “the discretion of authorities ” was severely deficient and recommended a predictable rules-based approach to monetary policy. In this lecture I examine monetary policy during the period since Friedman gave that lecture. I show that during the first part of this period—I’ll call it the Rules-Based Era— monetary policy, in broad terms followed a more predictable systemic approach, and economic performance improved dramatically. But during the second part of this period—the Ad Hoc Era—monetary policy returned to the “discretion of authorities ” approach that Friedman warne