The Pitfalls of Monetary Discretion

Commitment Versus Discretion in Monetary Policy

*The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. hether policymakers should commit to a certain course of action or have the flexibility to approach each situation as it arises continues to be a central question in the design of monetary policy. A seminal article written by two...

U Rules and Discretion in Monetary Policy

HOULD MONETARY POLICY be determined by a legislated rule or by a monetary authority’s discretion? Henry Simons (1936) first raised this issue as a choice between rules and authorities, terms little different than those used in recent discussions. He stresses the value of a rule, such as a law, instead of reliance on an authority’s discretion because “definite, stable, legislative rules of the g...

Rules and Discretion in the Conduct of Monetary Policy

Rules versus Discretion: Assessing the Debate over the Conduct of Monetary Policy Rules versus Discretion: Assessing the Debate over the Conduct of Monetary Policy

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. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved ov...

Rules, Discretion and Reputation in a Model of Monetary Policy*

In a discretionary regime the monetary authority can print more money and create more inflation than people expect. But, although these inflation surprises can have some benefits, they cannot arise systematically in equilibrium when people understand the policymaker’s incentives and form their expeziations accordingly. Because the policymaker has the power to create inflation shocks ex pest, th...