stanley fischer : monetary policy - by rule, by committee, or by both? speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the 2017 us monetary policy forum, sponsored by the initiative on global markets at the university of chicago booth school of business, new york city, 3 march 2017. * * * in recent years, reforms in the monetary policy decisionmaking process in central banks have been in the direction of an increasing number of monetary policy committees and fewer single decisionmakers – the lone governor model. 1 we are only a few months away from the 20th anniversary of the introduction of the bank of england ’ s monetary policy committee, just a few years after the 300th birthday of the venerable old lady of threadneedle street. the bank of israel moved from a single policymaker to a monetary policy committee in 2010, while i was governor there ; more recently, central banks in india and new zealand have handed over monetary policy to committees. the federal reserve is not part of this recent shift, however. the federal open market committee ( fomc ) has been responsible for monetary policy decisions in the united states since it was established by the banking act of 1935, two decades after the founding of the fed itself. 2 the movement toward committees reflects the advantages of committees in aggregating a wide range of information, perspectives, and models. despite the prevalence and importance of committees in modern central banking, the role of committees in the formulation of policy has not attracted nearly as much academic attention as has the research on monetary policy rules. 3 the literature on monetary policy rules stretches back to at least adam smith and includes important contributions from david ricardo, knut wicksell, and milton friedman. more recently, john taylor has moved the research agenda forward with his eponymous rule, and a large number of academic papers have been written examining the effectiveness and robustness of policy rules. 4 in contrast, as noted, study of the role of committees in making monetary policy has been fairly light, notwithstanding the insightful work of alan blinder and others. 5 committees and rules may appear to be in opposition as approaches to policymaking. one might even argue that if a central bank ever converged on a single monetary rule, there would be no need for a monetary policy committee. in practice, the fed operates through a committee structure and considers the recommendations of a variety of monetary rules as we make monetary policy decisions. our decision is typically whether to raise or reduce the

proximity can often mean economic and financial linkages. but even economies on the other side of the globe, with few direct linkages, can be affected for no other reason than that they are classified as “ emerging markets ”. such countries might well have some weaknesses such as those noted above which, given time and a measure of economic and financial stability, might be adequately addressed. but under conditions of widespread desire to shed risk, they become immediate stumbling blocks for markets. this can put intense pressure on the policy authorities and economies of these countries - pressure which few countries can withstand easily. for these reasons, the picture looks different from the perspective of the emerging market economies. what is good for us after a long period of evolution need not be good for another country at a much earlier stage of that evolution. in modern parlance, it is essential to get the sequencing right. countries have to attain a high standard of financial infrastructure and regulation before they can submit themselves to the potential instability inherent in the totally free movement of capital. in the meantime, they should integrate themselves as closely as they can into the international capital market and, as their markets evolve towards maturity, they can take additional steps progressively to liberalise their regulatory regimes. to expect them to do it in the other order is to ask them to run before they can walk. 3. what should we do about it? fortunately, there is now a widespread agreement that something has to be done to improve the international financial system. the degree of instability, if it continues unchecked, could lead many participating countries to question the whole legitimacy of the system. the severity of the contractions in asia is the most striking example, but so is the sudden recognition that a hedge fund can become so important that its failure could pose a systemic threat to the united states and international economy. the fact that the second most important exchange rate in the world the us dollar - yen rate - could move by 20 per cent in a month without there being a material change in fundamentals has also caused concern. i think there is now agreement that something has to be done, and it is heartening to see that the united states has taken a leadership role, including by convening the group of 22 and its three working parties. i also think that the australian government has played a very useful role - first by its representations to the imf urging more flexibility in its handling of the indonesian crisis, and secondly by its attempt to keep the momentum of apec heading in the