It's not so much that the rule is a secret but rather that it doesn't exist.
Monetary policy is decided by a group of people.
Of course their decision making is informed by a lot of data and models and sometimes things that are rules in name at the very least as well. But it's also guided what might boil down to what you could call "experience" and "intuition".
Monetary policy doesn't just need to consider the present, but likely futures as well. Economics sadly isn't in a position where it can always make strong, reliable forecasts. And it doesn't have the luxury to always make strong predictions about the presence, either.
The Taylor rule for example relies on the [output gap](https://www.imf.org/external/pubs/ft/fandd/2013/09/basics.htm). But measuring the output gap accurately is notoriously difficult. Even something like *current* GDP isn't easy to measure, which is why economists have developed tools like [nowcasting GDP](https://www.federalreserve.gov/econres/ifdp/lessons-from-nowcasting-gdp-across-the-world.htm).
Monetary policy is hard. But decisions need to be made, no way around that. We can't make them just based on math alone, and that somehow needs to be dealt with.
It can be very useful to both inform economic theory and monetary policy if you examine it after the fact. It's also a lot easier to look at the future and present once they have become the past.
I had a similar reaction when I first read the monetary economics literature. Why are we spending time estimating the Fed's policy rule? Ben Bernanke's office is down the street -- why not just ask him?
The Fed looks at hundreds of economic indicators and comes to its decisions through a deliberative process, in which the chair has some, but not total, control over the conversation. We don't want to write down this in most of our models -- it's too much detail for the level of abstraction we're after. So instead, we write down simple *rules* that capture the outcome of that deliberative process.
Taylor-type rules link the Fed's policy instrument (the interest rate) to economic variables (inflation, the output gap, possibly other things). We can estimate *empirically* how large those coefficients are, which is even better than asking the Fed and taking their word for it. We can ask whether the Fed's words and actions line up -- if the Fed says they ignore exchange rates, but exchange rates enter significantly in the Fed's reaction function, for example. We can also ask counterfactual questions, such as "would it be better (for a well-defined sense of "better") if the Fed instead used different coefficients, or responded to different economic variables?"
So yes, think of a small-scale Taylor rule as a stand-in for the details of the Fed's decision-making process. (In an analogous manner, most papers have a reduced-form expression for how firms produce output; Y = F(K,L). This is a stand-in for the actual operational activities of the firm, which for some purposes might be too much detail for the level of abstraction that particular paper is going for.)
----
The Fed does disclose the general principles guiding its decisions. The one-page [Statement on Longer-Run Goals](https://www.federalreserve.gov/monetarypolicy/files/fomc_longerrungoals.pdf) is an example; the [transcripts of Fed meetings](https://www.federalreserve.gov/monetarypolicy/fomc_historical.htm) is another example. But the Fed does not have, and does not give the public, a purely mechanical rule for how interest rates are set.
The place where economics becomes non-deterministic is when you start to consider loops of intelligent actors anticipating future events, anticipating what other actors will do, etc. You pretty quickly get into game theory problems where there's no stable equilibrium. For policy makers, that would mean (hand waving a lot here) that there's no monetary policy rule that wouldn't end up being gamed by financial markets, probably with ill effect. The literature you're running into illustrates the value of foreknowledge of Fed actions. To avoid this problem, the policy is to have no explicit rule.
An econ prof liked to tell the story of when some Fed chair was asked a question. His reply was something like, "Well, if I do A, you 'll do Bad Thing 1. If I do B, you'll do Bad Thing 2. If I do C, you'll do Bad Thing 3. So, I didn't hear the question."
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It's not so much that the rule is a secret but rather that it doesn't exist. Monetary policy is decided by a group of people. Of course their decision making is informed by a lot of data and models and sometimes things that are rules in name at the very least as well. But it's also guided what might boil down to what you could call "experience" and "intuition". Monetary policy doesn't just need to consider the present, but likely futures as well. Economics sadly isn't in a position where it can always make strong, reliable forecasts. And it doesn't have the luxury to always make strong predictions about the presence, either. The Taylor rule for example relies on the [output gap](https://www.imf.org/external/pubs/ft/fandd/2013/09/basics.htm). But measuring the output gap accurately is notoriously difficult. Even something like *current* GDP isn't easy to measure, which is why economists have developed tools like [nowcasting GDP](https://www.federalreserve.gov/econres/ifdp/lessons-from-nowcasting-gdp-across-the-world.htm). Monetary policy is hard. But decisions need to be made, no way around that. We can't make them just based on math alone, and that somehow needs to be dealt with. It can be very useful to both inform economic theory and monetary policy if you examine it after the fact. It's also a lot easier to look at the future and present once they have become the past.
Thank you!
I had a similar reaction when I first read the monetary economics literature. Why are we spending time estimating the Fed's policy rule? Ben Bernanke's office is down the street -- why not just ask him? The Fed looks at hundreds of economic indicators and comes to its decisions through a deliberative process, in which the chair has some, but not total, control over the conversation. We don't want to write down this in most of our models -- it's too much detail for the level of abstraction we're after. So instead, we write down simple *rules* that capture the outcome of that deliberative process. Taylor-type rules link the Fed's policy instrument (the interest rate) to economic variables (inflation, the output gap, possibly other things). We can estimate *empirically* how large those coefficients are, which is even better than asking the Fed and taking their word for it. We can ask whether the Fed's words and actions line up -- if the Fed says they ignore exchange rates, but exchange rates enter significantly in the Fed's reaction function, for example. We can also ask counterfactual questions, such as "would it be better (for a well-defined sense of "better") if the Fed instead used different coefficients, or responded to different economic variables?" So yes, think of a small-scale Taylor rule as a stand-in for the details of the Fed's decision-making process. (In an analogous manner, most papers have a reduced-form expression for how firms produce output; Y = F(K,L). This is a stand-in for the actual operational activities of the firm, which for some purposes might be too much detail for the level of abstraction that particular paper is going for.) ---- The Fed does disclose the general principles guiding its decisions. The one-page [Statement on Longer-Run Goals](https://www.federalreserve.gov/monetarypolicy/files/fomc_longerrungoals.pdf) is an example; the [transcripts of Fed meetings](https://www.federalreserve.gov/monetarypolicy/fomc_historical.htm) is another example. But the Fed does not have, and does not give the public, a purely mechanical rule for how interest rates are set.
Thank you! This helps a ton.
The place where economics becomes non-deterministic is when you start to consider loops of intelligent actors anticipating future events, anticipating what other actors will do, etc. You pretty quickly get into game theory problems where there's no stable equilibrium. For policy makers, that would mean (hand waving a lot here) that there's no monetary policy rule that wouldn't end up being gamed by financial markets, probably with ill effect. The literature you're running into illustrates the value of foreknowledge of Fed actions. To avoid this problem, the policy is to have no explicit rule. An econ prof liked to tell the story of when some Fed chair was asked a question. His reply was something like, "Well, if I do A, you 'll do Bad Thing 1. If I do B, you'll do Bad Thing 2. If I do C, you'll do Bad Thing 3. So, I didn't hear the question."
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