Why the Fed Should Follow Rules

How should monetary policy be conducted? What previously was a question of interest only for a subset of economists has exploded into popular debate since the 2008 financial crisis. This, no doubt, is due to the Federal Reserve's unprecedented activities during the crisis. Some, such as Stanford's John Taylor, have accused the Fed of fueling a speculative boom by keeping interest rates "too low for too long" in the years running up to the crisis. Others, such as monetary-economics blogger Scott Sumner, argue instead the Fed was responsible for not acting swiftly and decisively enough when the trouble in asset markets became apparent. Whatever the reason, many believe that the Fed bears some of the responsibility for putting the "Great" in Great Recession, and that its activities must be scrutinized to discover how its operating framework can be changed to avoid such a calamity in the future.

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