ABSTRACT
Monetary policy depends on many relationships in the macroeconomy working correctly for its transmission to be both efficient and predictable. Alan Greenspan, the immediate past chair of the Federal Reserve Board, was chastised many times by the press for being obstinate in his remarks about future monetary policy.1 This opaqueness was purposeful, as Greenspan thought (and many economists do) that providing the financial markets with any true sense of policy’s direction would begin a speculative frenzy surrounding every Federal Open Market Committee (FOMC) meeting. Such an announcement effect provides a press release with similar effects to actual policy changes. If the markets learned from these statements and the central bank shapes their statements correctly, the announcement effects can initiate policy before its actual occurrence and smoothly transition markets from one equilibrium to another. The US central bank has been famous for its design as autonomous from the American government, specifically autonomous with regard to fiscal policy and politics; autonomy enhances the predictability of central banker discretion to shock the economy if and when needed.
