monetary policy management rules vs discretion

Journal of Political Economy 44 (1): 1–30. Alberto Alesina, Andrea Stella, in Handbook of Monetary Economics, 2010. Although the classic rules versus discretion debate was usually carried on as if the only policy rule were the constant growth rate rule for the money supply, feedback rules in which the money supply responds to changes in un- employment or inflation are also policy rules. Fischer, Stanley, 1990. Rules can directly limit the actions taken by a monetary authority. Monetary policy is often only noticeable when the Federal Reserve gets it wrong, as it has several times in recent history. Until 1977 the general argument for monetary rules suffered from the apparent dominance of discretion: if a particular monetary policy was desirable, it could always 09 adopted by discretion. This paper examines the case for rules rather than discretion in the conduct of monetary policy, from both historical and analytic perspectives. In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, and the Bulletin on Health — as well as online conference reports, video lectures, and interviews. 2. rules versus discretion To what extent should monetary policy be governed by a predetermined rule versus chosen at the discretion of a policy maker? ... and the limits to, the heavy reliance on monetary policy in combating inflation. Tångavägen 5, 447 34 Vårgårda info@futureliving.se 0770 - 17 18 91 Read John Taylor’s chapter “National and International Monetary Reform” in. Rules versus discretion: a debate about the exercise of judgment in economic policy making. All Rights Reserved. Policy can be conducted by rules or discretion. Rules Versus Discretion. The time-(in)consistency literature, launched bu Kydland and Prescott (1977), shows that discretion-based solutions would be the first-best in terms of agents’ utility, but they are not time-consistent. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. When this is the case, there is value for rules over discretion, for constitutional constraints on the conduct of monetary (and fiscal) policies, or for other ways to tie the government’s hands. 3 Rules vs. 12 • “Monetary Policy: Targets and Instruments”, “Inflation Targeting”, “Rules vs. Discretion”, and “Monetary Policy Rules” • “Rules vs. Discretion” formal model is most important, and Mankiw Ch. This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. of fiscal and monetary policy swings. In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. Compliance and risk management. Downloadable (with restrictions)! Representative Offices. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the … While the general in°uence of structural and preferences parameters on the performance of monetary policy under this rule is not afiected, discretion is never better than this rule … the statesmen, and The most debatable topic in the conduct of monetary policy in recent times is the Rules versus Discretion controversy. Proponents of discretion, ‘have firmly rejected the use of strict rules for policy, arguing that central bankers must be left free to set monetary policy as they see fit, based on their best judgment and the use of all relevant information’ (Bernanke). versus discretion” as explained in Taylor and Williams (2011); it was “rules versus chaotic monetary policy” whether the chaos was caused by policy makers’ discretion or simply exogenous shocks like gold discoveries or shortages. Monetary-policy rules are attempts to cope with the implications of having a medium of exchange whose value exceeds its cost of production. Until 1977 the general argument for monetary rules suffered from the apparent dominance of discretion: if a particular monetary policy was desirable, it could always 09 adopted by discretion. would have a discretionary monetary policy. Rules-based monetary policy gives a central bank a strict set of guidelines that dictate its future actions. ), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier. The article discusses the fundamental principles of macroeconomic policy. In fact, strategic responses of rational, utility-maximising agents lead to an ex-post sub-optimal arrangement; rules ensure that – ex-p… ... Let's start with the monetarist and new classical arguments in support of policy rules for the conduct of monetary policy and balancing the budget. Discretion ** Parts of this entry have been adapted from a post on rules vs. discretion by Jason Buol and Mark Vaughan, published by the Federal Reserve Bank of St. Louis. In retro- The debate over “rules vs. discretion” was a centerpiece of disputes over monetary policy during the 1960s-1980s. Two classes of monetary rules can be identified: (1) price rules that target the value of money in terms of a real commodity, e.g., gold, or in terms of some index of prices, and (2) quantity rules that target the quantity of money in circulation. DISCRETION. A rules-based monetary policy is more effective in promoting economic growth and stability than a discretionary monetary policy. © 2020 by the Board of Trustees of Leland Stanford Junior University | Privacy Policy, Reducing Carbon Emissions with Nuclear Power, "John Taylor on Wages, U.S. Economy and the Taylor Rule" on Bloomberg, “Central Bank Models: A Key to Future Monetary Policy” by John Taylor, “A New Opportunity for Monetary Reform” by John Taylor, “Unconventional Monetary Policy, Normalization, and Reform” by John Taylor, "Rules for International Monetary Stability: Past, Present, and Future" by Michael D. Bordo and John B. Taylor, "The Taylor Rule and the Transformation of Monetary Policy" edited by Evan F. Koenig, Robert Leeson, George A. Kahn, “National and International Monetary Reform,” chapter by John B. Taylor in Blueprint for America. One argument made by the proponents of rules in these hearings was that discretion was undesirable because it made monetary policy depend upon the vagaries of the selection of policymakers. The debate of rules versus discretion in economic policy has its origin in the writings of Henry Simons at the University of Chicago. The introduction of the notion of dynamic inconsistency made a stronger case for rules, the final sections analyze tine case for rules rather than discretion in the light of recent game theoretic approaches to policy analysis. Some macroeconomists thus have argued in recent years that monetary policy should be ‘rule-based’ rather than discretionary, that is, Central Bankers strictly would have to follow some kind of monetary policy rule without the authority to deviate from it. 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