Menzie Chinn, who may or may not endorse the content, offers a guest post by Alex Nikolsko-Rzhevskyy, David Papell and Ruxandra Prodan. They write,

How does this relate to the proposed legislation? Our evidence that, regardless of the policy rule or the loss function, economic performance in rules-based eras is always better than economic performance in discretionary eras supports the concept of a Directive Policy Rule chosen by the Fed. But our results go further. The original Taylor rule provides the strongest delineation between rules-based and discretionary eras, making it, at least according to our metric and class of policy rules, the best choice for the Reference Policy Rule.

In the current political climate, the proposed legislation will inevitably be interpreted in partisan terms because it was introduced in the House Financial Services Committee by two Republican Congressman. Not surprisingly, the first reporting on the legislation by Reuters was entirely political. This is both unfortunate and misleading. We divided our rules-based and discretionary eras with the original Taylor rule between Republican and Democratic Presidents. If we delete the Volcker disinflationary period, out of the 94 quarters with Republican Presidents, 54 were rules-based and 40 were discretionary while, among the 81 quarters with Democratic Presidents, 46 were rules-based and 35 were discretionary. Remarkably, monetary policy over the past 50 years has been rules-based 57 percent of the time and discretionary 43 percent of the time under both Democratic and Republican Presidents. Choosing the original Taylor rule as the Reference Policy Rule is neither a Democratic nor a Republican proposal. It is simply good policy.

I would take the empirical work with a grain of salt. Imagine that monetary policy has no effect whatsoever. Then the Fed may be more likely to appear to be following a Taylor rule when the economy performs well than when it performs poorly.

(Tyler Cowen comments tersely on the post, “not my view.” See Nick Rowe as well.)

But the larger point is that the authors correctly guess that the reaction to the legislation will be based on mood affiliation rather than substance. See my earlier post.

The other recent example suggesting that we are in an era of mood affiliation is the Ex-Im bank.