indeed significant benefits. 2 policies characterized by commitment have been shown to lead to more economic stability – lower and less volatile inflation and less volatile output. in fact, the mainstream theoretical finn e. kydland and edward c. prescott, “ rules rather than discretion : the inconsistency of optimal plans, ” journal of political economy, 85 ( june 1977 ), pp. 473 – 91. for an excellent overview, see richard clarida, jordi gali, and mark gertler, “ the science of monetary policy, ” journal of economic literature ( december 1999 ), pp. 1661 – 1707. bis central bankers ’ speeches models that we use for monetary and macroeconomic analysis are built on the notion that monetary policy is conducted in a rule - like manner. the practice the practice part of the session title has proven to be a bit more elusive. the science of monetary policy has not progressed to the point where we can specify the optimal rule for setting monetary policy. the reason is that optimal rules, that is, those that maximize economic welfare, are highly dependent on the particular model from which they are derived, and there is no broad - based consensus for the right model. more relevant is the finding that the optimal rule for one model can produce very bad outcomes in another model. in addition, optimal rules can often be quite complex, thus making them difficult to implement and to communicate to the public. in other words, they may not be very transparent. however, these limitations to implementing optimal policy rules should not deter us from efforts to adopt a more systematic rule - like approach to the conduct of policy. there has been a great deal of progress made in identifying simple rules that appear to perform well in a variety of models and environments. such robust rules can form a basis for developing more systematic, rule - like policymaking. one important and desirable characteristic of a systematic and rule - like approach to policy relates to communication. in particular, it is an approach that is easily communicated to the public and thus greatly improves the transparency and predictability of monetary policy, which reduces surprises. the public and markets are more informed about the course of monetary policy because they understand how policymakers are likely to react to changing economic circumstances. equally important in my view is that greater clarity about the policymakers ’ reaction function strengthens accountability and thus can serve to preserve the central bank ’ s independence. the most well - known simple rule, of course, is the one proposed by john taylor in

to providing important guidance for current policy decisions, taylor - like rules can also be extremely useful in providing guidance for the expected future path of policy. such forward guidance has received a good deal of attention recently. one reason for this increased attention is that short - term rates have been constrained by the zero lower bound. thus, forward guidance and communication regarding future policy decisions take on greater significance. however, forward guidance is not a separate or independent policy tool. its effectiveness is intimately related to other features of monetary policy. monetary policy should be thought of more holistically, if you will. how effective we are with forward guidance, for example, can only be assessed or thought of in the context of a central bank ’ s overall approach to policy, including its approach to communication and transparency. in particular, i see a credible, rule - like approach to policy and the general openness and transparency of the policy process as essential elements in shaping expectations. indeed, a commitment to a policy framework that is systematic and rule - like provides the foundation for establishing expectations concerning the future path of policy and thus forward guidance. rules as benchmarks : a step forward so from my perspective, using taylor - like rules to shape current and expected future policy is an important and useful part of any monetary policy framework. the operational question is how might one go about such an effort? this is not a trivial assignment. as i mentioned at the outset, it has proved to be quite elusive. in a stylized world, where there is a single monetary policymaker who has considerable confidence in a model of the economy, communication would include a forecast derived from this model. this forecast would incorporate a policy path that yields the best economic outcomes based on that single policymaker ’ s views. unfortunately, we don ’ t live in such a world. monetary policymaking is often conducted by committee, and divergent views can and often do exist. while this can be clumsy at times, such governance mechanisms ensure that various views are heard in an environment that promotes better decisions and better outcomes. nevertheless, i believe that given the nature of u. s. institutional arrangements, taylor - like rules can serve a very useful purpose. specifically, they could underpin the construction of a periodic detailed monetary policy report, a feature of communication that has been adopted by many central banks around the world. however, while these reports have many similarities, there are some key differences. many central banks include detailed forecasts in their published reports and highlight risks along with the