 I'd like to introduce our speakers this morning. First up, we'll have David Laidler speaking. He is the Professor Emeritus of Economics at the University of Western Ontario, and of course, one of the foremost scholars of monetarism. He also published two books, among many others, but the demand for money and introduction to microeconomics were published in multiple editions. Following David Laidler, we'll hear from David Glassner, who is an economist at the Federal Trade Commission. He's also an expert on the history of monetary policy. His book is Free Banking and Monetary Reform, and he received his doctorate at the University of California in Los Angeles. And then wrapping up our panel will be Mark Hulabria. He is the Director of Financial Regulatory Studies at the Cato Institute. He was formerly a senior staffer at the Senate Banking Committee, and he got his doctorate right here at GMU. David Laidler, I'd like to welcome you to start us off. So let me thank George and Scott, among others, for inviting me here and coaxing me into writing a paper. That adjective emeritus has actually a Latin word that means not on the payroll anymore. And when you're not on the payroll anymore, you don't write so many papers. So it was an interesting experience over the summer. As you'll discover, David Glassner and I have written heavily overlapping papers without an iota of collaboration. So we've agreed on a division of labor for the presentation, whereby I shall talk more about generalities and only sketch out a little bit of history. And David will talk more about the history. So let me start with my first generality, which is that in this area, semantics matter. And that word, or that phrase, monetary rule, covers a multitude of different items in the monetary policy literature. It can go all the way from legislated quasi-constitutional constraints on the pursuit of policy that sets goals for the policymakers and even sets procedures whereby they are supposed to be able to attain those goals. That's what a completely legislated Taylor rule would be in my understanding. All the way down to informal descriptions of rules of thumb that have been used within central banks to give them some idea about what they think they're doing. The archetype of that was the Bank of England's Palmer rule in the 1830s, which was just a rule of thumb for governing its volume of discounts as a function of its reserves, which apparently was more honored in the breach than in the observance. And there's a whole string of things in the middle. Now, my paper is skeptical of monetary rules, but I want to be very clear about what kind of monetary rules I'm skeptical of. It's the legislated quasi-constitutional kind of monetary rules that I'm worried about. I am not a fan of monetary policy based on the principle of anything that might look good today, we'd better try and see what happens. That's not the point. I think monetary policy should follow principles. I think that those principles should be transparent to the people on whose behalf policy is being made. I just think there should be room for interpreting them flexibly and, if necessary, actually changing them when the evidence piles up that they aren't working as expected. Now, my fundamental reason for taking this position is not very difficult. It has to do with the workings of a thing that I have long labeled the monetary order. That's a kind of pompous phrase that you'll find in Karl Brunner's writings and Bob Mondal's writings going way back to the 60s and 70s. But it's not really a pompous phrase. It's just want to refer to something that is a little bit broader than the monetary system or the monetary policy regime. And I don't think this morning we go too far wrong if we think about the monetary order as being made up of four overlapping items, the goals of monetary policy, the institutional framework through which people responsible for monetary policy carry out monetary policy aiming at those goals, the expectations of the public about how monetary policy is being conducted and what its effects are going to be, and then a whole lot of political items about the way in which those agents who are forming the expectations in another role as voters can hold accountable for the outcome of what they are doing. The policymakers are supposed to be carrying out monetary policy on their behalf. Now, my basic point is, and it's hardly original, and I think you're going to hear it from a number of people today, is that the current state of economic understanding pervades the monetary order at any particular time. Let me just use the phrase economic ideas as a shorthand. How people think the monetary system works affects the way the monetary system works. It affects the choice of goals. It affects expectations about how policy is going to work out, and that in turn affects the way in which policy does work out. And of course, it affects the way in which the electorate respond if they are in a system that helps them, enables them to hold the policymakers accountable. Now, the point about economic ideas from the perspective of a historian of monetary economics is that they evolve over time. But it's not that they just evolve over time. Economic ideas affect the way in which the economy behaves. And when the economy behaves in a manner which is not consistent with current economic ideas, which is usually, those economic ideas get revised one way or another. And we start again. The interaction of economic ideas and the behavior of the economy, it's a self-referential recursive dynamic process. And because what people think affects what they do and what they do affects what they observe, which affects what they think, there can't be any guarantee that you're ever going to converge on something like the true model of the economy. Indeed, I would argue that the notion of the true model of the economy is a very unscientific notion indeed. I think suppose it existed, and suppose you had it. How on earth would you know? The idea of a true economic model really is of no use in economics. It's not at all helpful. Now, obviously, the people who are proposing monetary policy rules understand all this just as well as I do. And there is a very, very intellectually respectable way of analyzing the evolution of economic thought, which can be deployed to support legislated rules. Let me try to outline what it is. I think it's probably the majority of you among economists these days. It is the best analogy for economic science is probably the natural sciences. And the way in which economic science evolves over time is that ideas get proposed. The good ones continue to live and are developed. The bad ones get weeded out so that, at any particular time, what's in the current textbooks contains all that is useful to know that's been inherited from the past. And all the stuff that was also in the past that isn't in the textbooks has been discarded for good reason because it's wrong. And today's economists don't need to worry about it. This is the argument that's been put at many, many department meetings when the motion has been up to remove the history of economic thought from the graduate curriculum. And it's carried weight in an enormous amount of institutions. And I believe very, very unfortunately. But nevertheless, the argument is there. And of course, this is an argument that validates modern ways of proceeding in macroeconomics in which you model the economy, you attribute to the agents an understanding of the true model of the economy. There isn't dissonance at any deep level between what happens and what the agents expect because the agents act as if they have the true model of the economy. And though there are different versions of this around at any moment in time, the purpose of economic research at the moment is to weed this stuff down closer and closer to that true self-referential model of the economy. And once you've got that, you've got a good idea of how monetary policy works. And if you've got a good idea of how monetary policy works, and economic agents have got that understanding as well, well, why not make it clear? Why not spell it out in some rules? And why not to take care of the accountability problem, make those rules binding upon the people who are carrying out monetary policy? And now we live happily ever after in an economic system in which the monetary system sort of functions. Now, I have a quotation here that I think summarizes that point of view. So let me read it. In a free enterprise system, we obviously need highly definite and stable rules of the game, especially as to money. The monetary rules must be compatible with the reasonably smooth working of the system. Once established, however, they should work mechanically with the chips falling where they may. To put our present problem as a paradox, we need to design and establish with the greatest intelligence a monetary system good enough so that, hereafter, we may hold to it on rationally, on faith, as a religion, if you please. Some of you will recognize that quotation. It comes from Henry Simon's 1936 article on rules versus authorities in monetary policy. And it's embarrassing, in a way, right, if you think what's happened between 1936 and now. The late 1930s weren't the greatest. The Bretton Woods system was not exactly a roaring success. We had the great inflation. We had the 1980s decade of central banks saying, trust us till we figure out what to do. Sometime in the 1990s, a few central banks seemed to have figured out what to do, and inflation targeting spread. We had the great moderation, and it looked like it was working. And he, 1990s, sorry, 2007, started to come off the rails in a way that surprised most of us. It certainly surprised me. I'm not going to take a vote on who was surprised. But if you're honest, most of you guys were surprised about what happened after 2007. And yet, somehow, here we are again, back with Henry Simon's in 1936. There's something odd here. Now, once again, I think the proponents of monetary rules are just as well informed as I am about all this. And there is an answer available to them in the literature, which is, cast in terms of this model of economics, as if a natural science, making slow and steady progress, weeding out bad ideas, getting technically more adapt as it progresses, which was interrupted once by a huge anomaly called the Great Depression, coupled with the Keynesian Revolution. And these, according to this view of things, was a huge anomaly in the history of economic thought. It's a period in the history of economic thought which detracted from knowledge. We learned nothing about the way the economy worked from Keynesian as disciples. But thank heaven, or thank Milton Friedman first, and Bob Lucas, and Tom Sargent, and that later, we are now back on track. And in my written paper, I have documented these propositions in the literature. They are there. Well, my last three minutes has got to be devoted to telling you that there is another view of the history of economic thought in which what went on before 1936 is just like what went on after 1936. It's a history of changing ideas, of policymakers getting things wrong, of debate about where to go next, of trial and error coming off the tracks. And in particular, it's a story about the 1920s and 30s getting going, because policymakers in 1919 in a number of countries, not least the UN or the UK rather, were so devoted to a monetary rule that said they had to honor the pre-war parody that they made a colossal mistake when they tried to get the gold standard going again after 1914. Let me just summarize my story of the gold standard and all the rest of it. The story of the gold standard was the story of a series of policy rules that never quite worked out as expected, a system that settled down with the budget principle to some kind of constrained discretion, which was undermined at a very deep level by developments in economic analysis, the development of index numbers, that actually persuaded everybody finally that stabilizing the price of money in terms of gold wasn't the same thing as stabilizing the price level, and a big shift in the theory of value from the labor or cost of production theory of value, which made basing a monetary system on gold something that was natural and not to be questioned and changed it simply into one among a number of alternatives that had to be tested out on its merits. Rhee Keynes and the Bretton Wood system, let me just say that the Bretton Wood system was pretty awful. But boy, the post-World War II era was better than the post-World War I era. And the problem with the Bretton Wood system was that the key currency country refused to obey the rules of the game that it had put in place in the first place, and economic ideas that attributed inflation to cost push instead of to monetary factors had a lot to do with the unraveling of the 1970s and the 1980s. I agree with Orthodox economics, because I was part of the process in a minor way, that the restoration of a little bit of 19th century wisdom to monetary economics from the 1960s onwards went an awful long way, and I was feeling awfully smug. Around about 2006, about how inflation targeting was spreading, and Andy Rose had this paper called Bretton Woods on his head. It looked like there was a new international monetary order just around the corner. Well, bingo, that's all gone. So I time is up, so I will leave you with two thoughts. I would like to propose to you that monetary policy presents problems that are not there to be solved once and for all with rules. They are to be coped with over time, according to principles that evolve in the light of experience. And like every good story, my story has a subtext. You can't talk sense about these things without studying the history of monetary economics, and the sooner it is restored to the graduate curriculum in every PhD-granting university in this country or on this continent, the better. Thank you very much. Our next presenter will be David Glasner. OK, so just by way of introduction, I want to thank the Mercatus Center and Cato Institute for having me here. And two other preliminary remarks. First, I'm an economist at the Federal Trade Commission. However, I'm speaking here in my personal capacity, and anything I say does not reflect or necessarily reflect any of the opinions of the Federal Trade Commission or the commissioners. And the third thing I want to say in introduction is that I'm really almost overwhelmed to be sitting on the same panel here today with David Laidler, one of my all-time favorite economists. So it's a big day for me to be here. As David already said, our papers were conceived totally independently. And there is a great deal of overlap. So I'll just incorporate by reference about 98% of what David has already told you. And so what I want to focus on are some specific episodes in the history of monetary rules. And so just to get started in the discussion, I'll give you my historical conjecture about what was the first monetary rule. May or may not be accepted, but this is sort of my working hypothesis. The first rule was the assignment of value to something worthless by making it transferable into something valuable. So think of a banknote. It's worthless. We're going to give it value by saying it's convertible into a fixed weight of gold. That was the first monetary rule. And it was adopted so unselfconsciously that it was just sort of seemed like natural. So in that sense, it wasn't a self-conscious monetary regime that was instituted. It just happened. But it became self-conscious early in the 19th century when in the course of what is known as the bullionist debates, which transpired as a result of the suspension of convertibility of Bank of England notes into gold in 1797 and the early stages of the Napoleonic Wars between England and its allies in France. And there was as a result of the suspension of convertibility there were huge debates about what the Bank of England was carrying on and what it was doing right, what it was doing wrong. But the upshot of the debates was a consensus or a near consensus in Britain that the way to get things back on track is let's get the pound banknote back to being convertible into a fixed weight of gold. And that's what happened at the end of the war. There was a process of restoring convertibility. But by 1821, that convertibility was restored and it was restored self-consciously. I think there was even an act of parliament at that time that made a legal definition of what the pound was as a fixed weight of gold. So that was like a real monetary rule. So just to give you a little preview, what I want to discuss now is how that worked out and what actually did not work out all that well. But it led to a series of debates subsequently that sort of defined the way the gold standard played out for the rest of the 19th and early 20th century until World War I when the gold standard collapsed. And then there was a reconstruction process after World War I. That did not work out well either. And then the title of my paper is A Rules Versus Discretion Historically Contemplated. And the idea of or the juxtaposition of rules as the opposite of discretion was introduced by none other than Henry Simons, whom David Laidler was just quoting from. His paper was called Rules Versus Authorities in Monetary Policy. But authorities there stood for discretionary action by authorities. So that's sort of where I'm going in that also brings in. So Simons is this figure who represents rules versus authorities. But he harks back to an earlier idea about monetary rules, which I'll just get to in a minute. And then I'll try to see if possible how Milton Friedman sort of carried the torch that Henry Simons tried to pick up. But I may have more topics here than I can cover in the allot of time. So we'll just see how far I get. So to circle back to where I was about a minute ago, the gold standard was restored in England in 1821 and legally restored in England in 1821. And people thought, oh, this is great. We've got the gold standard. It's just going to work out splendidly. Well, it didn't work out so splendidly because in 1825 there was a major financial crisis. There was another major financial crisis in 1836. And that got people really upset about how things were not really working out. The gold standard was not working out the way they wanted to. What was the gold standard? The gold standard at that time was a simple rule specifying what the value of a bank note was in terms of fixed weight of gold. And that's, as I would understand it, it's my understanding of what the rule was and what the gold standard was. So they tried to fix that apparent malfunctioning of the gold standard by something called the Bank Charter Act of 1844, which was often referred to as Peele's Bank Charter Act. Peele was the great prime minister of England in the 1840s. And the enactment of the Bank Charter Act was associated with another huge debate, somewhat similar to the earlier bullionist debates. But this was a debate between the Bank, what was called the Banking School and the Currency School. The Currency School were the advocates of the Bank Charter Act. And the Currency School had a certain model of how the gold standard should work. And that model of how the gold standard should work was not the kind of gold standard which defines the value of something worthless in terms of something valuable, but it was a non-gold standard. It was just gold. So David Hume in the 1750s had a wonderful paper in which he discussed what became known in monetary economics as the price-species flow mechanism. That was supposed to tell you what was going to happen. If all of a sudden 80% of the gold in Great Britain disappeared, how would things work out? And Hume said, oh, things would really work out well because you would just have a redistribution of gold. Prices would adjust. Things would come back automatically. And everything would be fine. But that whole discussion was based on all the money was actually gold. It wasn't bank notes. And so the Currency School said, oh, it's not working out the way David Hume said because we've got all these bank notes here and they're mucking up the system. You've got banks that are just creating bank notes and that's inflationary. But we have a fixed exchange rate between bank notes and gold. So how do we deal with this? Well, we'll just make every bank note represent an actual amount of gold reserves so that the bank notes will in fact be just warehouse receipts. Of course, that was a problem because they already had a huge amount of bank notes circulating that weren't, quote, backed by gold. So they said, OK, well, we can't do anything about that. So we'll just sort of grandfather those bank notes in. But if you create any more bank notes, you can only do that if gold comes into the country. So that will mimic the price-PC flow mechanism that David Hume suggested. And now we'll be back where we should have been in 1821 and life will be good. The banking school, who opposed the currency school, said, no, no, it's not going to work that way. Because the reason people hold bank notes is because bank notes are cheaper. They get value from holding bank notes. And if you force the system to work as if it was just gold, all these services that banks are providing are not going to be provided anymore because all the adjustment will have to take place through the price level, not through supplying the public with the currency that they need. So they said, that's not going to work. Well, guess what? It didn't work. And so in 1847, 1857, 1866, there were, again, severe financial crises. Each of one of those crises required the suspension of the Bank Charter Act. And because the Bank Charter Act only covered bank notes, but not deposits, guess what happened? Banks started creating deposits instead of bank notes. So you still had a fractional reserve currency, except it was primarily a deposit currency instead of a bank note currency, as it had been before 1844. So my basic thesis, and I don't know how much time I have left. Eight minutes. OK, well, I can work with that maybe. So my basic thesis is there are two basic kinds of rules. There are price rules defining the value of a bank note in terms of a fixed weight of currency, or more generally controlling the value of bank notes currency in terms of some broad price level. And there are quantity rules. The Bank Charter Act tried to impose a quantity rule on the gold standard. In fact, it essentially wanted to replace the gold standard in the sense that I indicated at the very beginning of my talk with a quantity rule that said the amount of money in the system can only change in exact on a pound for pound basis with the amount of gold that's in the reserves of the Bank of England. A 100% reserve requirement, or in the case of the Bank Charter Act, a 100% marginal reserve requirement. So you have these two paradigms. You have a price rule, you have a quantity rule. And what seems to me the very interesting thing about the quantity rule that was suggested by the currency school was that it was effectively displacing the gold standard as the fundamental rule. There still was a gold standard. There was still gold convertibility. But in terms of how the system was functioning, that was just like excess baggage. That was a fifth wheel. What was doing the work or what was intended to do the work was controlling the quantity. The gold standard was only useful as a means of controlling the quantity of currency in the system. OK, so the gold standard evolved and the way it evolved. It turned out it was not an international system when Britain adopted in 1821. But it came in an international system over the course of the 19th century. The Bank Charter Act basically became irrelevant at least by 1870, if not earlier. Well, it had to be suspended in 1866. So somewhere between 1866 and 1873 when Walter Badgett basically dismissed it as being irrelevant to the way the system worked in Lombard Street, the system had evolved in a way that made the quantity rule that the currency school through the Bank Charter Act attempted to impose on the system essentially it wasn't operating that way anymore. OK, three minutes. So how do I finish off this story? I'll just go straight to Henry Simons. Henry Simons essentially wanted to recreate the fixed mechanical rule that the Bank Charter Act unsuccessfully tried to impose on the British monetary system with a monetary system which he was one of the originators of called 100% reserve banking. However, in his 1936 paper, he basically gave up. And it tore him apart. He was so disgusted by the fact that the 100%, he was convinced the 100% reserve system would not work because you would have to revolutionize the entire financial system to be able to get it to work. Otherwise what happened to the Bank Charter Act would happen again because you would just create money substitutes near monies, they would replace the 100% reserve currency and you would be back where you started from. So Henry Simons just threw up his hands and discussed and said it's not going to work, I'm throwing in the towel, the best we can do is have a rule to stabilize the price level. Milton Friedman was Henry Simons' disciple, his teacher at Chicago. And he, in his early writings, was a very committed supporter of 100% reserve banking. But somewhere along around 1960, he also gave up on 100% reserve banking. And he said, oh, we don't need 100% reserve banking, all we need to do is control the money stock. And let it grow, but at a fixed rate, where whatever it was, you pick the number k somewhere between greater than 2, less than 5% a year. And that will work and will eliminate discretion and the world will be fine. Well, it wasn't fine. And as David Laidler has explained, it's not going to be fine, because whenever you try to impose some fixed quantitative rule on the behavior of the money supply, it's just going to fall apart. And on that happy note, I think I'll just stop. Thank you, David Glassner. Our next speaker already taking the podium is Mark Calabria. Good morning. Let me say I'm incredibly flattered to be included on this panel. I was so flattered I was tempted to change my name to David to fit in. But I figured it would help with the discussion that since I'm going to be essentially the skeptic of discretion, if you are the proponent of rules, that maybe that will help keep some clarity. Now, one of the evolving tools within economics recently, and certainly since I left grad school, has been the greater use of behavioral economics. And so I'm going to focus my presentation on, is there a behavioral case for monetary rules? To some extent, I think I can characterize maybe the conversation to be that my co-panelists would say, we don't know enough to rely on rules. And I'm going to say, we don't know enough to rely on discretion. And to some extent, to keep consistent with my theme of behavioral, following on George's suggestion that we tweet, I've actually included my Twitter handle. But honestly, for my own behavioral needs, so that when I look out the audience and see you on your phone, I can tell myself that you're live tweeting rather than doing something else. Let me start with telling you what I'm not going to talk about and telling you what I am going to talk about. And so the first thing I'm not going to do is talk about what is the right rule or what is the best rule. I'm not even really going to talk about what a rule is, although I hope we get into this during the discussion because I think that's a very important part of the discussion. And nor am I going to make the argument that rules always outperform discretion. In fact, my argument's going to be that rules can outperform discretion. And then of course, my modest objectives here, first ask the question, are federal reserve policy makers susceptible to cognitive biases? Second, what are some of those biases that they may be susceptible and how would we see them play out with in monetary policy? And lastly, what are some potential de-biasing mechanisms, including rules? So let's talk about, you know, how susceptible is the Fed to bias? Now there's a very large literature in terms of when should we trust experts? I would make the argument that implicit in the case for discretion in monetary policy making is that, you know, hey, these guys are experts, they're economists, after all, they have to know what they're doing. And of course, there's a large area of research that sort of asks, what are the conditions under which we should trust experts and which we should not? And I'm going to summarize that literature by basically saying if there are two conditions that seem to be necessary for us to want to rely on expertise. The first is that those experts operate in a regular predictable environment. You can think for yourself whether monetary policy sounds, the conduct of monetary policy fits that or not. And the second is that there's an opportunity for learning, for repeated practice. And so I'm going to suggest that perhaps the environment for monetary policy doesn't fit that. And then we think about it in some ways such as this, the typical term on the board at the Federal Reserve is about five to six years. Fortunately, we don't have a turning point in the economy that often. In fact, on average, even if you were to serve the full 14 year term on the Federal Reserve Board, you would thankfully live through maybe one recession, serve through one recession. So you quite frankly, in my opinion, are not getting the experience you would need at the board to be able to react and to figure out actually how the economy works over time. We often hear the Federal Reserve invoke the sort of picture of themselves as firefighters. And of course, one of the interesting things in the literature is veteran firefighters actually do seem to have this sixth sense of when is the floor gonna go and when is the roof gonna go. Unsurprisingly, novice beginning firefighters do not. And it takes literally dozens, if not hundreds of actual fires for you to figure this out. Again, fortunately, we don't have these fires this constantly with our macro economy to suggest that this learning environment is there. And that says nothing of those of you who take the two years off so you can keep your tenure and hang out at the board for two years. That's you're almost never gonna be able to learn enough be anything contributing in terms of experience at the board in that sort of environment. Now, one of the other findings that comes out of behavioral economics is many of these biases disappear with experience and market pressures. Do we believe that the Federal Reserve is going to be subject to such market pressures that we can sit here and say that, well, okay, this doesn't work, but this works. I would suggest that the Federal Reserve doesn't have a lot of alternatives, doesn't have a lot of competition in this way. And so some of the normal mechanisms that we see that reduce biases in the marketplace simply aren't there in terms of Federal Reserve policy makers. So moving on, if we accept, and again, let me say some further evidence that's perhaps the Federal Reserve policy makers lack experience and knowledge is their own words. And so this is a quote from December 1978 in terms of the FOMC meeting. I will say, certainly, this was a tough time for the Fed. I think that's fair to say, but the conversation between Boston Fed President, Frank Morrison, Chairman Miller, and I think the things I would highlight, I love these comments, Mr. Chairman, I don't think we understand what's going on in the economy. I'll go along with that. We haven't had enough experience. This is fairly telling. Now, if you reaction is, well, Mark must have just sort of cherry-picked this, but that's gonna be true to some degree, but I think if you read Peru's the Minutes of the Federal Reserve meetings over time, you probably won't find things this brutally honest, but you're gonna find these continuing theme over time of members of the FOMC kind of admitting that, hey, we don't know what's actually going on. And again, my emphasis here is that the experience and knowledge you would need to truly be an expert, like a doctor or a veteran firefighter is lacking. And I hope I can get away with that, saying that as a fellow economist. But again, I think the evidence from the FOMC itself is that this knowledge base simply isn't there. So let's, if we can buy into the case that Federal Reserve policy makers are indeed human, like the rest of us, and suffer cognitive biases and are not in an environment in which those biases are likely to disappear, what are some of those biases likely to be? In no way do I think this is exhaustive. I will emphasize the title of my paper was A, behavioral case, not the behavioral case. So this is not a full catalog, but I've listed about five here, and I wanna talk about two or three that I think are the most likely. So one of the things that I think that probably plagues monetary policy making as well as macroeconomics is availability bias. And that is of course, is that when we are asked to estimate the probability of an event, we are estimate of the probability of an event is influenced by the events that we can remember. I would go as far to say, I mean, there's any macroeconomist who doesn't know about the Great Depression, for instance, or any macroeconomist who doesn't know about the Great Inflation. So again, when you start to think about, well, how frequent are these events, I would argue maybe useful to see how many papers are published about the year 1929 versus any other year, and my guess would be the frequency far outpaces what you would think would be a randomness. And again, I think if you go back and look, and to me, again, this is maybe more that the press as well as not to pick on the line, but the dialogue around every time there seems to be a recession, there's somebody who says there's the Great Depression right around the corner. Of course, it may well be right around the corner, but the point being here is that Federal Reserve policy makers are likely to suffer from this availability bias of thinking about certain events in outer proportion to the actual underlying true frequency of those events. The same would be representative bias. Of course, we've all heard the fewer glasses, you must be smart. Of course, we all know an experience that's not true. But of course, there are other ways to deal with this foremost in monetary policy questions about have recent changes in energy prices, for instance, reflective of broader changes in society in terms of inflation, what's the right measure of money? What's the right measure of inflation? This also matters in terms of lender or of last resort. If you're talking to a small number of banks and they say they were facing liquidity needs, does that tell you that all banks are facing liquidity needs? Or does it happen to be that only the banks that are facing liquidity needs are coming to you and talking about liquidity needs? So again, all sorts of representative problems that are gonna face a decision maker in terms of monetary policy. Last, let me talk about, I'll skip over the status quo bias and over confidence and come back to those later. But I think we also hear embedded in a lot of monetary policy conversations, loss aversion. Certainly conversations about, we've won these hard, fart battles against inflation and we must protect that credibility. Or we've brought down the unemployment rate and we have to protect these job gains. That sounds a lot like loss aversion to me in a very big way. And now again, some of this could say, well, okay, let's say that we're likely, the federal reserve policy makers are likely to serve from cognitive biases. Does it matter? How does that necessarily in and of itself make the case for rules? And what I'm building upon here is Ron Heiner's work in which he talks about decision making as a competence difficulty gap. And not to go through the math, but essentially the confidence difficulty gap is driven by two broad categories of factors. The first of which is the complexity of the decision problem. And the second is the agent's competence in determining the relationship between its behavior and its environment. Won't go through the math, but the bottom line is a larger competence difficulty gap means a lower reliability of decision making. And it means the more likely that rules are outpouring discretion. Largely because you're just as likely to make bad decisions, or you do are to make good decisions when you have a very large gap. I would make an argument, quite simply put it this way, monetary policy is hard and we aren't very good at it. And therefore relying on discretion is likely to lead us astray. And this of course is not to say that rules will be perfect, but with the rule will be much less likely to deviate and distracted by essentially cognitive biases. So let's talk about for a second, accepting that again, the Fed can be subject to these biases and that these biases can lead to bad decisions and that these bad decisions can somehow be overcome by rules. I'll start with a great quote to me from Daniel Kleinman, to maximize predictive accuracy, final decisions to be left to formulas, especially in low validity environments. That sounds a lot like monetary policy to me. And so to some extent, could you set a focal point, whether it's a rule, whether it's a benchmark, whether it is an informal sort of rule of thumb. So for instance, I'll give you what I think is a fairly widely used sort of rule of thumb or rule, which is there seems to be operating at the Fed, a very strong for rule that all else equal, unless there's a strong case otherwise, all changes in the target federal fund rate shall be 25 basis points. In fact, if you go back and look to 1990, since 1990, over two thirds of changes in the federal fund target rate have been 25 basis increments, one way or another. That doesn't strike me as necessarily random. Certainly doesn't strike me as an optimizing agent that is free of biases. So, but again, if you put this in the behavioral context and ask, well, you know, if you put the, maybe the way I think about it is if you're in a dark room, you don't take big leaps, you take small steps. And I think that that's a fair analogy. The only way for me to really try to make sense of why do we see this very, very heavy bias, this rule toward 25 basis points at a time really seems to be to me the behavioral case, rather than believing that this is actually optimizing behavior. So again, some of what I'm trying to argue today that the behavioral economics can give us some greater understanding of how this isn't your main at the Fed and how some of the choices are made. Another potential, which I think the evidence is a little bit more mixed here, is can committees help? Of course we know some monetary authorities are single agents. Ours is of course a committee. Would that be possible to debias by having this argument back and forth? There's some arguments. Blinder and Morgan have specifically looked at some classroom experiments on monetary policy and came to the conclusion that having a committee would reduce biases. There have been other cases. Recently, Coach Lakota has said that in his opinion, the norm of consensus at the Federal Reserve results and status quo bias. So again, you could have a committee, but the rules of that committee and how that committee function could also determine whether you've debiased the committee or not. Lastly, there's a literature largely in the administrative law section that makes the argument that adversarial review, largely by courts, looking at rules, looking at litigants can come up with ways to debias juries and debias rulemaking. I think the way this would most fit in the monetary context would be sort of a GAO audit. But again, something like this where you have this adversarial rules and attempt to debias. So I'm almost out of time. So let me wrap up with starting point. Fed is unlikely to be immune from cognitive biases. These cognitive biases may give some frame of references such as the Great Depression, Great Inflation. Biases reduce competence. Competence reduces the reliability of discretionary decision making. Rules may allow decision making on average to improve. But I think the underlying question, which I have not answered today, but I think the question for further research is, is this quantitatively significant? Is this such a big impact? Do we know how much the deviations in terms of bad decisions that have been made? And let me end with saying, I found a lot of, I really enjoyed the two previous papers reading them. And I found myself in agreement with a lot of them. And I walked away for much of them reading them saying, boy, it sounds like we've made a lot of mistakes in discretionary monetary policy, as well as rule-based monetary policy. So I see some of the historical evidence is largely very supportive of the case that we simply don't know enough to rely on expertise in monetary policy. So I hope I've provided a little bit for discussion. Thank you to all our panelists for your illuminating remarks and for providing really important, I think, historical background. I was struck in reading the papers over how much skepticism there was over the case for monetary policy rules at a conference that's about monetary policy rules. And we've talked a lot this morning about the evolution and the history, but we haven't actually defined what exactly is a rule. David Lader, I'd like to start with you because you started off your presentation by saying that semantics matter. Does the Fed's current framework of a 2% inflation target being data-dependent, does that constitute the type of monetary principles that your advocating central banks should follow or is that too much discretion? I don't like commenting on other people's monetary policy, but a 2% inflation target in principle is the kind of principle I have in mind. Now, if you ask me about the details, I have an aversion to deflaters and I have an aversion to targeting variables that you don't get an accurate reading of until six months or so after they've happened and so on and so forth. So whether the Fed has adopted a principle that I would support, maybe not, but is that the kind of principled behavior that I think can help economic agents out there interact with the Fed in a constructive and convergent way? Yes. David Glass, are there any thoughts as well on how you would define rule or principle or? Well, I think the implicit or possibly explicit criticism I was making in my talk and in the paper has to do more with the notion that you can have a formula a mechanical formula that will displace the exercise of discretion. I think discretion, I didn't get to this point in my talk, but I do discuss it in the paper. I think discretion is a very misleading term. Discretion in the context of monetary policy is to quote our friend Henry Simons is a synonym for arbitrary or dictatorial. I don't think that's what discretion means in the context of judging. Judges exercise discretion. It doesn't mean that they're acting willfully or arbitrarily. I think it's important for monetary policy to have goals and to have standards that they're being judged by. But that doesn't mean that you can just sort of as Milton Friedman like to say, you could just replace the Fed with the computer. I think that was shockingly, with all due respect to Nobel Laureate, shockingly misguided. Mark Calabria, there is legislation that has been considered, proposed legislation has been considered that would require the Federal Reserve to disclose any type of rule that it followed and to sort of say why it deviated from that rule if it did so. How does Capital Hill define rules for the Fed and is that an appropriate framework in your mind? That's a good question. Let me first say, I do think from a research and gender perspective that the definition of rule should be quite broad. And maybe this is my Jim Buchanan voice in the back of my head saying we should think about those rules and institutions. So for instance, I mentioned what seems to be the rule of 25 basis points at a time unless it's a strong case. Otherwise, I think that's a great research topic. Is that actually a good way to conduct monetary policy? What's the theoretical basis for that? But that's a relatively informal rule. So I look at norms and institutions as part of that structure as well from a research and gender perspective. Now let's go to the Capital Hill perspective. So the Capital Hill perspective is a question in terms of are you at least trying to minimize some amount of discretion? Are you trying to explain deviations from that discretion? So for instance, the Form Act, which is passed the House, sets up where the Federal Reserve says this is our essentially model of the economy. This is the rule we're gonna follow. And if we deviate it from it, which we can, we will explain why. And of course, I think that that's largely a positive in that you have that safety valve, if you will. You can deviate from it, but you're creating, again, I think this is actually a strong behavioral argument. Essentially, you're creating a reference point. You will go along with the rule, but you can deviate from it if there's very strong evidence elsewhere. And I would say that the degree of how much flexibility you have, I mean, certainly in one extreme, Congress could legislate a Friedman-style constant money growth rule if they wanted. That would be very, very specific and put a number in there. But again, what we've seen, I think in recent years, is a push for essentially forcing the Fed to say, we know that you in a discretionary environment are essentially operating under a model of the economy and we'd like you to disclose that model of the economy to the rest of us. And I think that brings up a good point, which is, you talked about norms in institutions, the 25 basis point assumed movement. For a long time, inflation targeting was a norm of an institution was implicit rather than explicit. Now the Fed has made it explicit and that's now falling under the framework of this is an acceptable principle that can guide central bank behavior. Question for the other two panelists, for the two Davids is, at an FMC meeting, not every meeting is a jump ball, right? I mean, there's some norms, some patterns that they're following. Shouldn't the Fed just disclose what those are? Wouldn't that be a case for following a rule broadly defined and for making it more public? I'm not gonna speak to the Fed, let me speak quickly to the Bank of Canada, which introduced an agreement where there was an agreement between the minister of finance and the governor. First one introduced in 1991 and it's the next one's coming up for renewal this November. Was a five year agreements with a 2% inflation target with a 1% point margin of error around it and every time the Bank of Canada takes an overnight rate decision which is eight times a year, it issues a press release explaining why it's done what it's done and sometimes it's press release as well. We don't actually expect to get all back on target for about 18 months and these are the reasons. This seems to me like the principled behavior that leaves the policy maker wiggle room that is very helpful but there are two important things to remember about the difference between Canada and the States. The first is that the Bank of Canada has no regulatory authority whatsoever over the financial system that's conducted by other agencies and the second is that the legislation makes the governor solely responsible for the conduct of policy. There is an informal committee that makes decisions but it operates by consensus and unlike the Fed, they won't let any one of them out of the building to make a speech unless it's been vetted to make sure that it is propagating the Bank of Canada's view. So that makes the process of communication and maintaining public confidence while you exercise the wiggle room a lot easier than it is under the Fed's arrangements. Well, I would just comment that I think it's good to expect the monetary authority to explain what it's doing and they should be subject to questions about why they're making certain decisions and I don't think they're responding to a lot of the criticisms that are being made and there should be some kind of more formal process of interrogation about why the Fed is acting in certain ways. Just a quick additional comment might be slightly off the subject but I think it's relevant is that I think a lot of the discussion about inflation targeting or a lot of the criticism of inflation targeting that's come up in passing in this discussion and many other discussions has to do with or would be remedied if we had as a target not an instantaneous rate of inflation but an inflation path and that's sometimes referred to as level targeting and that would on the one hand be more flexible but would also be more predictable over the long term which is the relevant time horizon. Mark Calabria, you argued that rules can help limit the inherent bias in humans and our inherent fallibility but those rules are also devised by humans which are inherently fallible. So how are the two different? So I certainly think that that's an important observation which is if you've got biased individuals that are making the discretionary decisions versus biased individuals making the rules. So let me first say part of my goals to try to ask what the right counterfactual is. I often feel like when I hear people say well we don't know enough to create rules well they don't really explain you're making an argument for discretion by default without actually talking about how discretion would work and so to me the right counterfactual is let's suppose a world in which a single agent is facing the choice of do you pick a set of rules? Do you bind yourself to a set of rules or do you engage in discretion? I think it's fair to say that that agent is gonna have a model of the economy in the agent's head that is unlikely to be correct. So let's start with that. Let's even assume that it's just drastically wrong but that model of the economy is gonna guide the discretion or the setting of the rule. So then we have to think about given that you have an agent with a erroneous model of the economy making discretionary decisions versus rule bound decisions at least the rule bound decisions have the advantage of being predictably wrong and so that other agents in the economy can make offsetting mechanisms whereas if you're erratically wrong it's gonna be much harder I think for other actors in the economy to make those decisions and to some extent it is this question of just like some of the time consistency literature I think there's often some of the behavioral economics is phrased as kind of a time inconsistency between your current self and your future self and your current self might say this is my model of the economy this is how I think the economy behaves and I don't wanna get distracted by other things when I'm actually in the decision making moment and a rule would at least and even if it's a rule in which you can deviate from a little bit like we some of the proposals before Congress you are essentially trying to reduce those deviations and so I do think that even if the model of the economy is wrong or even especially if the economy of the model of the economy is wrong you have a greater predictability with rules based than you will in terms of discretionary regime. Like sure. I think it's important to be explicit about a certain distinction here about what the rules are about. There are rules about objectives for the monetary authority and there are rules about instruments and there's a big difference between having a rule that says that the Fed or the monetary authority should have a rule to pursue a particular price level inflation, target, a dual mandate and a rule that says, well, you have to set your instrument according to a particular mathematical formula. I think there is a huge difference between those two and I don't see why the latter kind of rule which says you must set your instrument in the way I'm telling you has why that is regarded as being somehow more consistent with liberal values than just specifying the objective. I'd like to open it up to some questions from the audience. Does anyone have a question? Raise your hand and someone come around the mics right here in the front, Cameron? Or does someone else have the mic? Oh, please go stand by the mic or you can line up right over there. I think we have that one mic there. From George Mason University. Thank you for a great panel. I have a question for Mark. It occurs to me while listening to your talk that the type of rules that would be necessary would be different depending on the sort of game the central bank is playing. So there would be a difference between whether you're playing a cooperative game versus a more adversarial game. So in the example you gave of the 25 basis point adjustments, you know that's a kind of a shelling point. There's an incentive to converge to that rule so it's kind of self enforcing as opposed to something like you mentioned the time inconsistency game would be more adversarial. There's not a, you can't expect that to be self enforcing. So my first question is, do you think this is a valid distinction? And second, is there a case for, is there a case when it would be desirable to legislatively impose a rule on more of these, these behavioral sorts of problems which strike me as more of a coordination problem than a time inconsistency problem? Thank you. So you, to reiterate where I started my presentation, I purposely avoided the discussion of what a rule should look like and what would be the optimal rule for some of these reasons, because I do think that that's an important distinction. And so I do agree with that. I think the question of to me trying to come up with mechanisms for de-bias. So for instance, representative bias is a good example of to me a rationale for why you might want numerous regional banks that gather information from those districts. And so trying to build a, so one I would say rules are one mechanism. There are other mechanisms to try to de-bias as well like I mentioned committees. There could be different structures. The long terms of the Fed in some sense, which unfortunately don't really get served out in that way anymore, except of course for the occasional chair. These are in my opinion sometimes mechanisms that can help reduce some of the bias and some of the group think. Of course, I think it's also important as you mentioned the 25 basis points. This could be a game theoretic outcome. It could be a behavioral outcome. I think having a little more conversation research in terms of what could be the driver behind that is very helpful. But certainly creating a rule in which you're trying to guide the monetary authority essentially away from behaved cognitive biases. I think it'd be helpful. And now again, when you start to talk about how specific that rule is, well, that's an important conversation that I think it's difficult to do legislatively, but putting some sort of limits on discretion, I think are the direction to go. Next question. Yes, Stephen Keat, former Foreign Service Officer currently with the Fairfax County's Economic Advisory Commission. I noticed you're speaking or a number of you spoke about inflation targets, but we're talking about monetary rules to influence what the inflation rate would be. With our monetary, with our money supply, what about velocity? It seems to me that the Fed has been less effective than it would have liked to have been because it doesn't have control of velocity. And you can be pushing and pushing, expanding the money supply or trying to contract it. And if velocity is going in the opposite direction of what you want, you're ineffective. So I'd appreciate any comments that anyone has on that. Well, let me comment just again. Canadian inflation targeting simply does not rely on control of the money supply. It operates through the overnight rate and it operates according to something that looks very like a tailor rule. If the behavior of the money supply figures in policymaking at all, it's informal and internal and not discussed. My personal opinion is they would do well to set reference values for the behavior of the money supply and take notice if it was giving unfortunate messages. The European Central Bank stopped doing that at exactly the wrong time. And look at the mess that got them into after the financial crisis. But I don't think that issues about velocity and growth rates of monetary aggregates are front of center in monetary policy anywhere for good or ill at the moment. All right, next question. One of the, I'm Perry Merling from Barnard College. One of the takeaways I get from this panel is that this debate about rules or not, okay, is perennial. And I would like to push the panel to a little bit, a little meta thinking. Why is that? You know, why is that? What is that debate actually about? And we see that in the bullionist versus the anti-bullionist, the currency school versus the banking school. And we see it on this panel, right here. So it's perennial. It seems to me that in some sense, the reference to Simons has misled us in this regard because Simon's article sort of suggests that that debate is about markets versus socialism or freedom versus tyranny or something like that. Whereas the older debate, bullionist and then banking school, that wasn't about freedom and tyranny. That was basically about credit, discipline versus elasticity. And I'm wondering if maybe we should get back to debating discipline versus elasticity. And of course, there's no answer about which one is the right one for now. So I say, I'm not in favor of rules. I'm in favor of the debate about rules. Do you have a glass, sir? Well, I think that's a very insightful question. I don't have a full answer, but I think there, I agree that there is a huge ideological component in the rules versus discretion debate. And some of you may know that I have a blog. And one of my posts on that blog, I do is, I sometimes like to talk about Milton Friedman. And I think his objective was to get libertarians and conservatives off the gold standard, and because he didn't like the gold standard and thought it was a bad system, and he came up with all kinds of arguments, some better, some not so good, about why you don't need a gold standard because you can control the money supply. And I think I was sort of alluding to that. Some of you may have sense that I had was making certain allusions to Friedman and the gold standard in discussing the currency school. But I think that was a way for Friedman to frame the discussion in a way that could establish his ideological bona fides against the Austrian gold standard fundamentalists and said, my converted credentials are just as good as your credentials. Yeah, I mean, I agree with Perry that the debate is the thing. And that was really what was implicit in my comment that monetary policy issues raise problems that you cope with. You don't solve them once and for all. Every time someone has won a debate about a monetary rule and got it imposed and thought that that ended the debate, they turned out to be wrong because the state of economic understanding that informed the rule was time and place specific and the world moved on and the world started behaving in ways that the rule led you to expect that it shouldn't and the debate started again. So my plea is not much more than rules, guys. Don't kid yourself. Get up with arguing about what principles the Fed should apply and expect to be surprised if they do. So let me first echo that night. And I think that David's use of the sort of lack of convergence in his paper is a very good description of I think of why we have these conversations. To some extent, I think I read part of David's paper is basically saying nobody ever really wins the intellectual debate. It's just, for one reason or another, political or economic, this camp gets pushed aside. This camp comes in and you kind of have this journey and I think that's part of it is there has been no definitive this settles it. I want to go back to the first part of the question and maybe not the ideology of the politics, but I think that there is an element of rule of law that finds an attractiveness to it. I don't think this is some, I guess I should maybe put this in the context of I spend most of my time thinking about bank regulation. So if you think about conversations about London of last resort or what sort of discretion you should have or when you close down a bank, there are constant conversations about how much discretion should expert regulators have. And I suspect that this is true in areas outside of finance as well. So I think this is a cross cutting conversation about essentially an empirical question about how much face did you put in government experts in general? So I think it is in that context and certainly part of my objective in my paper is to say that we need to have at least some degree of skepticism that the expertise in and of itself is gonna be reliable enough and perhaps if that simply gets us to the point we have a debate and more scrutiny of those expertise decisions, then perhaps that will have us nudge along to the right decision or rather a little better decision because I guess I should emphasize, I don't think there is a right decision. Next question. Chris Hanser Coglou, I'm an investment advisor. With all this conversation about rules, I am curious what the panel's take is on quantitative easing and where we are right now with the QE program. We're in uncharted territory, I believe, and I'm just wondering how rules apply with where we are at this time with QE. I don't have anything useful to say about the current US policy situation, but quantitative easing is just a new word for what used to be called open market operations and if you're as old as I am, there's nothing unconventional about it. It's just a tool of monetary policy that kind of fell into disuse during the great moderation when it turned out that control of a very short-term interest rate was enough to achieve what the policy authorities thought they wanted to do. And if you go back to read the literature of the 20s, you'll find Ralph Hortree, for example, of the UK Treasury arguing that most of the time controlling bank rates all you need, but every now and then, if you've got a real problem, you might have to engage in open market operations. So I think the fuss about the novelty of quantitative easing has been greatly overblown ever since the Japanese first sort of had their little stop-and-go effort at it at the beginning of the decade, all the beginning of the last decade. Well, maybe the easiest part of that question is, where are we? Well, we're still engaging in it. We're still reinvesting the proceeds of it. So it hasn't expanded, but it hasn't ended its existence in terms of quantitative easing. But to me, I think this is partly evidence for the argument I've made about when you have discretionary behavior, you see more erratic behavior. And we have had this sort of post-crisis of, well, we've kind of lost our bearings, our compass isn't working in terms of the direction we're going, so let's try everything. And I agree that I think quantitative easing is less novel than it's often presented, but I also think it presents different problems than sort of normal short-term open market operations. And because partly I look at this at the bank's spec lens, what does this mean for the yield curve? How does that impact net interest margin? How does that impact lending? There are other questions that I don't think you get in the same way. And of course, the elements of quantitative easing doesn't make a difference that we've engaged in such very large-scale purchase of mortgage-backed securities. Is this implicit transfer to Fannie and Freddie in terms of supporting the mortgage-backed security market? So, for instance, I'll note that since Fannie and Freddie were taken over by the government, 60% of their debt issuance have been bought by the Federal Reserve. That's clearly not a free market in mortgage, so how is those distortions added up in that market? I think those are all important questions to ask. And again, part of my objective is to say rather than just taking the sort of Federal Reserve saying we're experts, trust us, and don't question any of this, is we should be questioning all of this. We had time for one last question. Larry White from George Mason University. I was happy to hear the gold standard mentioned, but I was a little unhappy at the way it was dismissed as unsuccessful. I know both David Laidler and David Glasner have publications with the phrase free banking in the title, so I know they're aware that there are alternative ways to run a gold standard. In particular, it isn't necessary to combine it with a central bank monopoly on currency issue, and so I wonder if they would agree that the frailties they're assigning to the gold standard, that is that it didn't quash the business cycle, should instead be laid at the door of the institutional arrangements which gave the Bank of England a monopoly which it didn't use very effectively. Very quick answer to a very complicated question. If in my paper you will see that I express a reasonable amount of content about contentment about the way the gold standard worked after the mid 1890s after the bi-metallic controversy was over and after the Sinai process came on, and I don't think the gold standard would have collapsed if it hadn't been for the First World War, and then the attempt to restore the rule which the restorer set a great amount of importance by of honoring the promises that had been made in 1914 that the pound sterling was worth, God knows how much it was a Troy pound, but it was the 1860 Acts number. So I'm not all down on the gold standard by any means. It was working. In terms of free banking, this is too complicated. I still have worries about the tendencies within free banking towards the centralization of the system's reserves that open up scope for monopoly if you're not awfully careful, and while you're being awfully careful, I wonder if those clearinghouses aren't going to end up looking a little bit like what we call central banks. Any other final thoughts on my panelist? Oh, sorry. Oh, if I can just squeeze in here at the end. I think of the much of what wrong with the gold standard and to this extent, I would agree with Larry also from UCLA, by the way, was the result of attempts to add on additional rules to the way in which the gold standard operated such as the Bank Charter Act. That said, I don't think that I would want to see us try to bring the gold standard back. I think we need to let go and move on. Thank you so much to all three of our panelists this morning.