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Challenges for Monetary Policy and Its Communication

Author

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  • Athanasios Orphanides

    (Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management (E-mail: athanasios.orphanides@mit.edu))

Abstract

The post-pandemic inflation surge underscores that monetary policy continues to be hampered by two long-standing challenges: the pretence of knowledge and the proclivity for discretion. Focusing on the Federal Reserve, this paper demonstrates how simple policy rules, designed to be robust under imperfect knowledge, can mitigate these challenges. The Fed's post-pandemic policy error-maintaining excessive accommodation as inflation pressures mounted-could have been avoided with guidance from a simple natural growth targeting rule that had been included in the Fed's Bluebook/Tealbook starting in 2004, but was not disclosed to the public in real time. Formal adoption and disclosure of such a rule can help discipline discretion and improve both the conduct and communication of monetary policy.

Suggested Citation

  • Athanasios Orphanides, 2025. "Challenges for Monetary Policy and Its Communication," IMES Discussion Paper Series 25-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:25-e-09
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    File URL: https://www.imes.boj.or.jp/research/papers/english/25-E-09.pdf
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    References listed on IDEAS

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    1. Carl Snyder, 1935. "The Problem of Monetary and Economic Stability," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 49(2), pages 173-205.
    2. John B. Taylor, 2024. "The Mayekawa Lecture: The Way to Stability and Growth in the World Economy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 42, pages 41-50, November.
    3. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    4. Athanasios Orphanides, 2024. "The Forward Guidance Trap," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 42, pages 71-92, November.
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    2. Wataru Hagio & Daisuke Ikeda & Yojiro Ito, 2025. "New Challenges for Monetary Policy Summary of the 2025 BOJ-IMES Conference," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 43, pages 1-28, November.

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    More about this item

    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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