The Art of Monetary Policy


  • The scientific approach to monetary policy, including a macroeconomic framework for analyzing inflation targeting and interest rate rules, has been very influential over the past 20 years.
  • In the wake of the financial crisis, however, quantitative easing and important structural changes in the economy have made the traditional science of monetary policy somewhat less useful for policymakers.
  • Until the scientific approach adapts to these changes, policymakers will likely have to rely less on models and simple policy rules and become more “artistic” in reading and responding to economic and financial signals.

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time.

— John Maynard Keynes, letter to Roy Harrod, 4 July 1938

Almost 20 years ago, Richard Clarida, Jordi Galí and Mark Gertler published a seminal article in the Journal of Economic Literature entitled “The Science of Monetary Policy: A New Keynesian Perspective,” which quickly became required reading for students of monetary economics and aspiring central bankers alike. The trio summarized the theoretical macroeconomic framework for analyzing inflation targeting and interest rate rules that has been utilized by many central banks around the world over the past few decades.

While monetary policy making had traditionally been seen as mostly an art (sometimes a dark one) that was typically practiced by bankers, the scientific approach became more and more influential, culminating in the rise of leading academic economists like Ben Bernanke and Janet Yellen to the helm of the Federal Reserve. However, like it or not, art may now be making a comeback in monetary policy, and partly at the expense of science. Here’s why.