In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. %PDF-1.4 %���� Page 1 of 2 Monetary policy is a powerful tool. Should Monetary Policy Be Made By Rule Rather Than By Discretion Sun, 21 May 2017 | Aggregate Demand As we first discussed in Chapter 27, the Federal Open Market Committee sets monetary policy in the United States. In more recent treatments of optimal monetary policy, discretion can still lead to inefficient outcomes which some type of commitment may overcome. This article summarizes two opposing views about how central banks should run policy: 1) central banks should stay close to predictable and well-proven rules; 2) policy makers should exercise discretion and choose the most favored alternative in each situation. Recently proposed legislation in Congress has picked up on this ongoing debate by asserting that the Federal Reserve should specify the systematic part of its policymaking. ��)u���>�z�b��-���?�w���2��]S�v�ݦDZ�i:��UAp3�=�Q\�y����Aΐd;#6[t�����"��:�������HKvL/��W[�d�w+�st�B�E:�Z]$���q�u�h�HbP�B����~6�BPT�!��V��Ӆ������_�)����$Rp��%�>M�g�O�����J�� Discretion and Monetary Policy’, October 13–14, 2017. 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. Given the importance of monetary policy, there is reasonable room for debate on whether monetary policy really should be left at the discretion of the Central Banker. Should monetary policy be determined by a legislated rule or by a monetary authority’s discretion? The empirical evidence, too, plainly demonstrates that monetary policy corresponded far more closely to simple policy rules in the 1980s and '90s than it had in the previous two decades — as shown, for example, in a 1995 study by John Judd and Bharat Trehan … RE: Should Monetary Policy Be Made by Rule Rather Than by Discretion? Small changes in the money supply can affect interest rates, the price level, and touch every aspect of the macro economy. In more recent treatments of optimal monetary policy, discretion can still lead to inefficient outcomes which some type of commitment may overcome. Monetary and Fiscal Policy Monetary Policy: Alternative Approaches Hot Topic: Should Monetary Policy Be Made by Rule or Discretion? Monetary policy discretion can be made more rule-like, by 1) adopting a nominal anchor such as an inflation target, and 2) communication of a monetary policy reaction process, especially through data-based forward guidance, in which the monetary policy authorities Rule vs. Should Monetary Policy Be Made by Rule or Discretion The Federal Reserve has from ECON 102 at University of Michigan For a detailed explanation of why monetary policy created by rules can be ever more arbitrary than that made by human decision makers, see my previous post here. Some argue that the Fed should not have so much discretion over the timing of such an important decision. Small changes in the money supply can affect interest rates, the price level, and touch every aspect of the macro economy. There can be a positive return to committing policy because committing future policy can 1 0 obj << /Type /Page /Parent 44 0 R /Resources 2 0 R /Contents 3 0 R /MediaBox [ 0 0 613 794 ] /CropBox [ 0 0 613 794 ] /Rotate 0 >> endobj 2 0 obj << /ProcSet [ /PDF /Text /ImageB ] /Font << /F1 55 0 R /F3 53 0 R /F4 58 0 R /F5 67 0 R >> /XObject << /Im2 4 0 R >> /ExtGState << /GS1 75 0 R >> >> endobj 3 0 obj << /Length 6677 /Filter /FlateDecode >> stream The most debatable topic in the conduct of monetary policy in recent times is the Rules versus Discretion controversy. Federal Reserve Chairman Alan Greenspan uses a variety of information to determine whether the Federal Reserve should act. ture monetary policy. Should Monetary Policy Be Made By Rule Rather Than By Discretion Last Updated on Sat, 24 Aug 2013 | Aggregate Demand As we learned in the chapter on the monetary system, the Federal Open Market Committee sets monetary policy in the United States. To understand and appreciate how the suggestions for policy rules Please help. View of … Henry Simons first raised this issue in 1936 as a choice between rules and authorities, terms little different from those used in recent discussions. The central bankers and policy … Rules vs. Check all that apply Monetary rules reduce the … In monetary policy, discretionary policymaking corresponds to the central bank seeking to influence or respond to momentary fluctuations in unemployment and inflation without a long-term strategy. Pro: Monetary policy should be made by rule . Proposed rules would restrict the Federal Reserve's discretion in various ways. In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. Discretion . This paper examines the case for rules rather than discretion in the conduct of monetary policy, from both historical and analytic perspectives. 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