Governor Christopher J. Waller of the Federal Reserve Board gave a speech at a conference, remembering and teaching on Bennett McCallum, a great American economist.
The Federal Open Market Committee issues post-meeting comments to better inform businesses and families about the Committee's deliberations. These comments are issued after each meeting. By tying decisions regarding the federal funds rate to broader economic factors like inflation and the status of the labor market, the market can be made more transparent and trustworthy. The three most important things that can be learned from the work of the late economist Ben McCallum are still applied as principles to economic policy today.
The first point that McCallum makes is that rules can have an anti-cyclical effect, which means that they can stabilize the economy despite its periodic ups and downs. When setting the longer-run inflation rate aim, this guideline is a cornerstone in helping to establish the market and public's confidence in the central bank, which is vital. There is a widespread consensus among economists that it is beneficial for monetary policy to have policy norms that are applicable across different time periods.
The second thing that can be learned from McCallum's study is that changing the parameters of the rules is an effective technique to model the disagreements that exist among economists over the optimal path for monetary policy. McCallum attempted to model the various theories on monetary policy as separate rule sets. Before it can make any recommendations, the FOMC must first determine how the effects of various actions might have on the economy. Due to the importance that this study has brought to the field of research on monetary policy, it has been included in the briefing materials that policymakers read prior to each and every committee meeting.
The third of McCallum's dictums said that it was almost always to one's benefit to adhere to predetermined protocols. When making decisions regarding monetary policy activities, rather than applying policy rules in a mechanical manner or taking them at face value, policy rules are used to gain knowledge about how the economy is reacting. These statistics, which are helpful to policymakers, are a big part of the reason why effective policymaking is possible. These qualities add greater weight to the widely held belief that McCallum's study is accurate and that monetary policy is more stable as a result of the predictability of the reaction function of policymakers.
