In its “Free Exchange” column, the Economist recently took up the issue of monetary rules. Provocatively titled “Rule It Out,” the column announced that “setting interest rates according to a fixed formula is a bad idea.”
Reading the column one quickly learns the author doesn’t understand what constitutes a rule, and what the argument for a rule is. The column moves from a general consideration of monetary rules to considering specifically the Taylor Rule. I leave it to Professor Taylor to defend his rule, which he did on his blog. I, however, consider the general case for monetary rules.