"Rational Expectations” Is The Basis For Setting And Understanding Monetary Policy
by William Poole
William Poole is president and chief executive officer of the Federal Reserve Bank of St. Louis. Previously, he was Herbert H. Goldberger Professor of Economics at Brown University, Providence, R.I. He was a member of the Council of Economic Advisers and a member of the Academic Advisory Panels of the Federal Reserve banks of New York and Boston. He began his career in the Federal Reserve System at the Board of Governors as an economist, and he served on the economics faculty at The Johns Hopkins University. He received a B.A. degree from Swarthmore College and M.B.A. and Ph.D. degrees from the University of Chicago. He co-authored Principles of Economics (1991) and authored Money and the Economy: A Monetarist View (1978) as well as numerous scholarly papers published in professional journals.
Most monetary economists today conduct their analysis within some version of a rational expectations model. A well-defined equilibrium in such a model requires that the private sector understand policy goals and the policymakers' model of the economy. An austere version of the model, with no information asymmetries, is valid only to a first approximation but nevertheless provides core insights to short- and long-run monetary policy. In this model, effective policy requires clarity of policy goals and clarity of the policy model as to how the economy works. The central bank must enjoy sustained credibility in the markets. Communication should focus on policy fundamentals and the monetary authorities’ understanding of the economy, both of which are enhanced by continued research by monetary policy experts.
Presented upon receiving the Adam Smith Award at the Annual Meeting of the National Association for Business Economics in Boston on September 11, 2006.
by William Poole