In a blog post, former Fed Chairman Ben Bernanke argued that the Fed should not conduct monetary policy according to a rule, such as the Taylor rule, that it announces in advance. Among other objections, Bernanke noted that “the Taylor rule assumes that policymakers know, and can agree on, the size of the output gap. In fact … measuring the output gap is very difficult and FOMC members typically have different judgments.” (Note: In answering this problem, you may want to review the discussion of the Taylor rule in Chapter 26, Section 26.5.)
a. Why is agreeing on the size of the output gap difficult?
b. Why might disagreements over the size of the output gap make it difficult for the Fed to use a pre-announced rule in conducting monetary policy?