rate 15 basis points on average, subject to possible judgmental adjustments. armed with this information and their own actually, the taylor rule has the stronger implication that the nominal funds rate should rise more than one - for - one when inflation rises, implying an increase in the real funds rate as well ( this prescription is the so - called taylor principle ). the taylor principle seems likely to be a feature of any good monetary policy and thus provides an important guidepost for policymakers. for example, one proposal would have the federal reserve adjust the growth of the monetary base in response to current macroeconomic conditions ( mccallum, 1988 ). another would replace the output gap in the taylor rule with output growth, a variable that ( unlike the output gap ) can be measured directly without reference to unobserved variables like “ fullemployment output ” ( orphanides and williams, 2002 ). robust feedback policies may also be useful when members of the policy committee disagree among themselves about how the economy works, if such a policy seems likely to produce acceptable results in each of the competing models or frameworks. although the simulation - based literature described in the text has produced many valuable insights, it also has a number of shortcomings : first, in conducting simulation exercises, researchers of necessity can consider only a relatively small number of simple and highly stylized economic models out of the large universe of possible alternatives. thus, simulations cannot demonstrate conclusively that any particular simple feedback policy would be robust to the types of uncertainty actually faced by policymakers. second, although these analyses are predicated on the assumption that policymakers do not know the structure of the economy, they usually assume ( somewhat inconsistently ) that private agents not only know the true model but also know the central bank ’ s feedback policy, which allows them to form accurate policy expectations. allowing for symmetrical uncertainty on the part of policymakers and private agents is difficult analytically but might produce different results. third, in assessing competing policies, these analyses ( with some exceptions ) often ignore the possibilities that policymakers will learn from their mistakes, modify or abandon policies that are producing bad results, or take into account their uncertainty about the underlying economic structure when they form their policies. estimates of how strong inflation pressures are likely to be over the next few quarters, financial market participants should be able to forecast future values of the short - term interest rate, allowing them to price bonds and other financial assets more efficiently. because, under a simple feedback policy, private -

does not require that the policy committee members adhere strictly to a particular econometric model or economic theory. economic forecasts, in central banks as in the private sector, typically reflect the output of a suite of models and statistical methods, plus a heavy dose of the judgment and insights of experienced economists. forecasts can also be structured to take into account model and data uncertainty - for example by down - weighting changes in variables, such as the output gap, that are known to be poorly measured ( williams, 2004 ). so long as policymakers and their staffs remain appropriately humble about their forecasting ability and their knowledge of the economy, proponents argue, forecast - based policies are likely to provide better results than simple feedback policies. supporters also point out that, in comparison with simple feedback policies, the forecast - based approach provides more guidance about how to incorporate judgment and special information into policymaking. as i have noted, advocates of both approaches agree that, in principle, good policy practice leaves scope for discretion and the use of expert judgment. but how, specifically, is this to be done? simple feedback policies, which presume a good deal of agnosticism about the economy ’ s underlying structure, do not provide a clear framework for answering this question, except in very qualitative terms. under a forecast - based approach, in contrast, the answer is straightforward : judgment or special information should affect policy choice to the extent that it affects the forecast or the risks to the forecast. for example, simulations of an econometric model may imply that policy a is likely to produce better outcomes than policy b ; but if expert judgment suggests that the model ’ s more realistically, the plan might include contingent elements ; for example, it might involve keeping the funds rate low unless inflation begins to rise, in which case rates would be allowed to rise as well. stipulating a policy plan, at least in general terms, is essential in the context of forecast - based policies, as specifying only the current value of the policy rate does not provide enough information to construct a forecast. forecasts do not take special information or circumstances fully into account, or that policy a entails some economic risks not captured by the model, then policy b may be preferred instead. what about the role of private - sector expectations in determining the effect of policy? again the information requirements of forecast - based policies are relatively more demanding. in contrast to the case of simple feedback policies, under a forecast - based