Rules Versus Discretion: Assessing the Debate Over the Conduct of Monetary Policy

John Taylor

No 18102, Economics Working Papers from Hoover Institution, Stanford University

Abstract: 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 over time. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the two approaches difficult. History shows that research on policy rules has had an impact on the practice of central banking. Economic research also shows that while central bank independence is crucial for good monetary policy making, it has not been enough to prevent swings away from rules-based policy, implying that policy-makers might consider enhanced reporting about how rules are used in monetary policy. The paper also shows that during the past year there has been an increased focus on policy rules in implementing monetary policy in the United States.

Keywords: Â (search for similar items in EconPapers)
JEL-codes: E52 E58 F33 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-02
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Rules Versus Discretion: Assessing the Debate Over the Conduct of Monetary Policy (2017)
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