Reviewing our experience of the past two or three decades, one is struck by the repeated tendency of financial systems to build up risk and leverage in good times, then shed it rapidly when conditions change.
Indeed, a commitment to a policy framework that is systematic and rule-like provides the foundation for establishing expectations for the future path of policy and thus forward guidance. If we only had a reaction function The appropriate way to make policy systematic and rule-like is to make policy history dependent and base policy decisions on the state of the economy.