Rules vs. Discretion and the Role of the Central Bank

Makram El-Shagi (), Florian Gerth () and Paul Philemon Lukuliko ()
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Makram El-Shagi: Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan
Florian Gerth: Asian Institute of Management, Philippines
Paul Philemon Lukuliko: Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan

No 2026/2, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

Abstract: We construct a new measure of monetary policy discretion by treating the predictable component of interest-rate changes as rule based and unexpected changes as discretionary. Using newly released high-frequency monetary policy shocks for 20 countries from 2000 to 2024, we document systematic cross-country variation in discretion. Two-way fixed-effects estimates show that greater central-bank independence is associated with higher discretion in developed economies. Event studies around irregular governor turnovers yield little evidence of politically driven discretionary shocks once transitional dynamics are accounted for.

Keywords: Taylor rule; Monetary policy shocks; High frequency identification; discretion; Central bank independence (search for similar items in EconPapers)
JEL-codes: E40 E43 E44 E58 E61 (search for similar items in EconPapers)
Date: 2026-03
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