Prolegomena to Any Future Monetary Policy

The author provides a review of the process of conducting monetary policy in the context of the so-called Taylor rule. The inputs to the Taylor rule are examined to determine their practical utility, which as it turns out, is limited at best. An econometric analysis is performed that leads to the proposal of a new predictive rule that focuses on the role of the stock market as the primary determinant of future interest rate policy by the Federal Reserve. The theoretical foundations of this new rule are examined in light of its surprising efficacy in forecasting future monetary policy, including a short monograph from Robert C. Merton.