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There is some well-documented persistence in deviations of the funds rate from the funds rate target. For example, see Taylor (2001). 8 This and subsequent analyses ignore the possibility of a small premium in the futures market, documented by Robertson and Thornton (1997), because any such premium is so small that its existence would have a negligible impact.

WHEN the Brookings panel first met ten years ago, the U.S. governments managers of aggregate demand were cooling an economy suffering from an inflation 4 points higher than ten years before. The unemployment rate was 4.5 percent. Four years later, at the time of the panel's thirteenth meeting, the demand managers were cooling an economy suffering from an inflation 6 points higher still. The unemployment rate was 5 percent. As the panel meets today, the government's managers of aggregate demand are cooling an economy suffering from an inflation 7 points higher than ten years before. The unemployment rate is 7 percent and rising. Higher inflation, higher unemployment-the relentless combination frustrated policymakers, forecasters, and theorists throughout tLhe decade. The disarray in diagnosing stagflation and prescribing a cure makes any appraisal of the theory and practice of macroeconomic stabilization as of 1980 a foolhardy venture. The patent breakdown of consensus spares me the task of seeking and describing collective views. I will just give my own observations and confess my own puzzlements. In one respect demand-management policies worked as intended in the 1970s. On each of the occasions I described at the beginning, the man-I am grateful to my colleagues at Yale and to members of the Brookings panel for comments on the original version, to Ray C. Fair also for the use of his model reported in the paper, and especially to members of the panel for many discussions of substance and for painstaking guidance of the revision. Bret Bertolin and Kathleen K. Donahoo provided efficient statistical and editorial assistance. Laura Harrison and other Cowles Foundation staff miraculously produced the typescripts under deadline pressures of my own making. The work was in part supported by the National Science Foundation and the Cowles Foundation.

The rational expectations revolution made clear that a complete macro model requires a specification of the government's economic policy. We argue that monetary policy should be conducted in such a way that the market can predict policy actions. An implication of market success in predicting policy actions is that interest rates move ahead of the policy actions, and such a timing relationship may appear to some as the central bank following the market instead of leading it. Another implication of the market predicting policy actions is that nominal interest rate changes provide no useful information to the central bank about the strength of aggregate demand or inflationary expectations. Finally, the failure of the market to predict policy actions reflects a problem that needs to be addressed. We explore the theoretical implications of a monetary policy that is completely specified and perfectly understood by the market. We construct a bare-bones model to illustrate the key concepts. Finally, we conduct an empirical investigation of these issues, especially in the context of monetary policy since 1988 when the establishment of the federal funds future market made available well-defined market information on expectations about Fed policy actions. *We appreciate comments provided by our colleagues at the Federal Reserve Bank of St. Louis, but retain responsibility for errors. The views expressed are ours and do not necessarily reflect official positions of the Federal Reserve System.

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