Improving the use of discretion in monetary policy

Frederic S. Mishkin

International Finance, 2018, vol. 21, issue 3, 224-238

Abstract: This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which have serious shortcomings. Rather, it can choose a constrained discretionary regime that has rule‐like attributes. To make monetary policy discretion more rule‐like, it can be improved by (1) adopting a nominal anchor such as an inflation target, a monetary‐policy strategy that has proved to be very successful in recent years, and (2) communication of a monetary‐policy reaction process, especially through data‐based forward guidance, in which the monetary‐policy authorities describe how the future policy path will change as economic circumstances change.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:bla:intfin:v:21:y:2018:i:3:p:224-238

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