Should monetary policy be determined by a legislated rule or by a monetary authority’s discretion? Henry Simons first raised this issue in 1936 as a choice between rules and authorities, terms little different from those used in recent discussions.
Because the Federal Reserve has shown interest in making price stability an explicit goal of monetary policy, examination of potential nominal anchors has become particularly relevant. A target path for nominal gross domestic product (GDP) growth is a possible nominal anchor that has received considerable attention since Bennett McCallum proposed an implementable nominal GDP targeting rule.
The Federal Open Market Committee (FOMC) holds the primary responsibility for monetary policy. This article argues that in 1992, mixed signals sent by M1, which grew rapidly, and M2, which grew slowly, were the source of an important tension in monetary policymaking.
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