Policy Rules and Targets: Framing the Central Banker’s Problem

Central bank policymakers are not primarilyrandom number generators.1 Reading boththe financial press and the work of academics,however, one might get the opposite impression.Reporters (and the readers of their stories) seem toattach considerable importance to each Federal OpenMarket Committee policy decision. Academic work on theimpact of central bank policy gives a similar impression, asstatistical procedures produce a time series of pure whitenoise innovations that are labeled “policy shocks.”2 Butcentral bankers expend substantial energy attempting totailor their actions to current economic conditions. Inother words, policymakers are reacting to the environment,not injecting noise.[...]