An Exit Rule as an Exit Strategy for Monetary Policy

Today’s hearing at the House Committee on Financial Services on “Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery” was cancelled because of snow. The hearing was to focus on whether the Fed’s extraordinary measures have worked and on an exit strategy from these measures. Ben Bernanke was to testify at the hearing and according to press reports he was to discuss the Fed’s exit strategy. His testimony will be posted on the Fed’s website.

I was asked to be a witness at the same hearing on a panel following Ben Bernanke’s testimony. Witnesses were asked to give an assessment of whether the extraordinary measures have worked and what is an appropriate policy for unwinding them. Here is the paper which I originally prepared for the hearing; it represents what I would have presented.

The term “exit rule” emphasizes that an exit strategy should describe how reserves and the Fed’s portfolio composition are to be adjusted over time in a predictable way in order to achieve the exit, much like a policy rule for the interest rate. I also propose a particular exit rule that might help policymakers develop such a strategy. It will be interesting to see whether the exit strategy in Ben Bernanke’s testimony has such predictable features.