Those who have been unemployed for a long period of time may lose their job skills and become less employable in the future. This can push up the non-inflationary rate of unemployment (NAIRU). Not only is this bad for those who are unemployed due to the loss of their job skills, it is bad for the nation as a whole because the rise in the NAIRU lowers the effective productive capacity of the economy and, with it, the capacity of the country to service its debts. 8  BIS central bankers’ speeches  In the current economic cycle, I think it is apparent that the path back to the Fed’s dual mandate objectives has been much slower than the one that the FOMC found acceptable in the past. Growth has consistently been disappointing relative to both our own and consensus forecasts. Recent performance and forecasts relative to the dual mandate objectives suggest that standard rules calibrated in earlier times understate the degree of accommodation required to achieve the desired return path to the dual mandate objectives. We should focus on how fast we are moving toward our employment and inflation objectives, and be wary of the risks that we see around that path. If progress toward the mandate objectives is slower than desired, then this is telling us that monetary policy needs to be kept at a more accommodative setting for a longer time period than a standard rule would suggest. As downside risks continue to be present, the case for accommodation is even stronger.
This suggests that policymakers, faced with the economic conditions of that period, weighted deviations from their goals in a manner similar to the weights used in these versions of the Taylor Rule. Despite these attractive features, I do not believe that simple policy rules can take the place of in-depth analysis of economic conditions, evaluation of alternative policy plans, and ultimately policy judgment. While simple policy rules provide useful information to policymakers, their very virtue – simplicity – means they cannot capture all information that is relevant for policymaking. For example, such rules cannot easily incorporate asymmetric risks or financial stability issues. Moreover, the usefulness of simple policy rules depends critically on the stability of the relationship between monetary policy and economic outcomes.