our friends. i can't think of a better way to honor john's contributions than to continue that discussion around the dinner tables of dallas by reflecting on the role of simple rules in informing policymaking. three benefits of simple rules in monetary policymaking in his carnegie rochester conference paper, john considered a simple policy rule under which the nominal federal funds rate is adjusted in response to both the gap between real i am sure my colleagues join me in honoring john. however, my thoughts on policy rules are my own and not necessarily those of my colleagues on the federal open market committee. jinill kim and andrew levin, of the board's staff, contributed to the preparation of these remarks. and trend gross domestic product ( gdp ) and the gap between the inflation rate and policymakers'target. based on data for the previous few years, john calibrated the long - run target for inflation and the two parameters that determine the responsiveness of the federal funds rate to the two gaps. the equilibrium real interest rate was based on a longer history of actual real interest rates. in the handout, figure 1a depicts the actual nominal funds rate and the taylor rule prescriptions between 1987 and 1992, as presented in john's paper. despite its simplicity, this policy rule fits the data remarkably well ; it described a period of generally successful policymaking ; and it adhered to the taylor principle of adjusting the nominal rate more than one - for - one with changes in the inflation rate, so it provided a plausible template for future success. it is no wonder that john has been such a dedicated salesman and that his efforts have been so well received in academia and policy councils. following john's seminal contribution, many other economists have engaged in research on similar policy rules and, together with john, have identified several benefits of such rules in conducting monetary policy. i will elaborate on three of them. the first benefit of looking at a simple rule like john's is that it can provide a useful benchmark for policymakers. it relates policy setting systematically to the state of the economy in a way that, over time, will produce reasonably good outcomes on average. importantly, the emphasis is on levels and gaps, not growth rates, as inputs to the policy process. this emphasis can be a problem when a level, say of potential gdp, is in question, but in many respects it is also a virtue. for the united states, the two gaps relate directly to the legislative mandate of the federal reserve to

of limitations was that simple rules do not take account of riskmanagement considerations. as shown in figure 2a, the core cpi inflation rate for 2003 was falling toward 1 percent. the real - time reading of the core pce inflation rate ( not shown ) was on average even lower than the comparable cpi figure. given these rates, the possibility of deflation could not be ruled out. we had carefully analyzed the japanese experience of the early 1990s ; our conclusion was that aggressively moving against the risk of deflation would pay dividends by reducing the odds on needing to deal with the zero bound on nominal interest rates should the economy be hit with another negative shock. this factor is not captured by simple policy rules. a final note i have offered this analysis in the spirit of so many of the discussions i have had with john. his framework has been enormously important to policymaking in the federal reserve, and it has yielded many benefits. nevertheless, it's important to keep in mind that some significant practical limitations also are associated with the application of such rules in real time. in other words, it's not so simple to use simple rules! references orphanides, athanasios ( 2003 ). " the quest for prosperity without inflation, " journal of monetary economics, vol. 50 ( april ), pp. 633 - 63. poole, william ( 2007 ). " understanding the fed, " federal reserve bank of st. louis, review, vol. 89 ( january / february ), pp. 3 - 14. taylor, john b. ( 1993 ). " discretion versus policy rules in practice, " carnegie - rochester conference series on public policy, vol. 39, pp. 195 - 214. _ _ _ _ _ _ _ _ _ ( 2007 ). " housing and monetary policy, " speech delivered at " housing, housing finance, and monetary policy, " a symposium sponsored by the federal reserve bank of kansas city, held in jackson hole, wyo., august 30 - september 1.