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Lawrence Summers agreed that transparency about monetary policy decisions is superior to a fixed mathematical feedback rule, but he thought that neither approach is the best available. He worried that there might be substantial benefits from a central bank not demonstrating "extreme fallibility," which is almost inevitable if the bank is too open about its forecasts. For example, if the Federal Reserve's projections of its own intentions differ significantly from market expectations, that might imply a lack of credibility on the central bank's part. It could increase its credibility by following through on its own projections, but this would come at the expense of enacting optimal policy on a moment-by-moment basis. Sims replied that he did not propose straightjacketing future discretion: projections and policies should certainly be revised, but these revisions should be somewhat predictable.

Gregory Mankiw added that the academic literature sides with Sims at the moment. If the chairman of the Federal Reserve has a certain view of the future, there is no benefit to keeping it secret, according to the current consensus. Mankiw thought it would be challenging to develop a model in which the Federal Reserve's economic or policy outlook must be kept from the public in order to yield optimal outcomes.

However, Mankiw argued, some practical considerations warn against the use of large models as advocated by Sims. In the United States, monetary policy is determined by a committee, not an individual, and it is much more difficult for a committee to agree on a vector of policy variables than on a single variable. Sims conceded that the Federal Reserve's policymaking committee is much larger than its Swedish counterpart, which consists of four people, and thus policy is more difficult to coordinate here than in Sweden. Still, he did not think the quantity of variables to be discussed [End Page 88] would be problematic: Discussions tend to focus on just two variables, the level of the interest rate and the slope of its trajectory.

William Nordhaus noted that the Federal Reserve's approach to monetary policy has become much more transparent over time, much like the approach in Scandinavian countries. Still, he recalled the many questions that people raised about the Federal Reserve's actions in relation to the asset price bubble around 2000, noting that just because the central bank has been competently managed in recent decades, there is no reason to assume this will be true forever. Requiring the Federal Reserve to explain its actions may prevent future catastrophic behavior. He suggested that it may not be necessary to announce the entire expected future path of the funds rate, but there is still room for improvement.

Sims agreed that a complete move to the Swedish model might not be realistic, but his emphasis on the Riksbank was intended to make the position Nordhaus had just described appear comparatively centrist. Benjamin Friedman added that Norway's population and GDP are approximately identical to Alabama's. He did not think it obvious that a country like the United States, whose central bank sets the price of instruments that are crucial to markets all over the world, has the latitude to do what a country with the same modest influence in world financial systems as Norway can. [End Page 89]



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