Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy

Philip Arestis and Alexander Mihailov ()

No em-dp2007-53, Economics & Management Discussion Papers from Henley Business School, Reading University

Abstract: This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting.

Keywords: optimal monetary policy; flexible rules; constrained discretion; central bank independence; inflation targeting (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2007-10
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Working Paper: Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:rdg:emxxdp:em-dp2007-53

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