Principled Policymaking in an Uncertain World

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Revised text of a presentation at the Conference on Microfoundations for Modern Macroeconomics, Columbia University, November 2010. I would like to thank Amar Bhidé, Roman Frydman, and Andy Haldane for helpful comments, and the Institute for New Economic Thinking for research support.

A crucial legacy of Phelps et al (1970) has been recognition of the importance of economic agents’ anticipations as a determinant of macroeconomic outcomes. This has had many profound consequences for macroeconomic analysis. Among them is the fact that the subsequent theoretical literature on monetary policy has focused on the analysis of monetary policy rules, rather than on decisions about individual policy actions. The present essay considers the reasons for this development, and the extent to which such a focus continues to be appropriate in the light of subsequent events —- changes in central banks’ approach to monetary policy in the decades since the publication of the Phelps volume, and even more crucially the reconsideration of macroeconomic theory and policy that is necessary in the wake of the global financial crisis.