Rules vs. Discretion: Decoding FOMC Policy Deliberations

Michael Bordo, Klodiana Istrefi and Humberto Martínez

No 33262, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This study provides evidence on the usage and preferences of Federal Reserve’s Federal Open Market Committee (FOMC) regarding the balance between rules and discretion in policy decisions. Analyzing FOMC transcripts over 40 years, we find that while Discretion has been a consistent feature in the language of the FOMC, the use of the language of Rules surged notably in the mid-1990s, aligning with theoretical advancements in monetary policy. We identify that a rise in Discretion terminology occurs during economic downturns and periods of heightened uncertainty. In contrast, a rise in the language of Rules is supported by higher references to terms such as “credibility” and “commitment,” and is more prevalent among hawkish FOMC members. Our findings link the increased use of the language of Rules (Discretion) language to tighter (easier) monetary policy, revealing a significant role of this debate in shaping policy outcomes, in particular periods.

JEL-codes: E03 E50 E61 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cba and nep-mon
Note: ME
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