Rules Are Meant to Be Broken: Arguments in Favour of Discretionary Monetary Policy

Sarah Small and Bhavya Sinha ()
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Bhavya Sinha: Colorado State University

Chapter Chapter 3 in Debates in Monetary Macroeconomics, 2022, pp 47-68 from Springer

Abstract: Abstract This paper criticizes strict adherence to monetary policy rules. Policymakers cannot observe or measure the things required by such rules, and adherence to such rules have often proved troublesome. For instance, attempts to follow a monetary policy rule like the Taylor rule led to inflation in the 1970s and using the Friedman rule during the Great Recession would have reduced monetary growth, which would have increased interest rates and made the economic crisis even worse. The paper therefore argues for discretionary monetary policy. Although rules can be a useful aid to central bankers and others when thinking about monetary policy, macroeconomic performance is driven by expectations, uncertainty, and particular socio-economic circumstances. Central banks need to pay attention to these rather than blindly following some monetary policy rule.

Keywords: Taylor Rule; Discretionary monetary policy; Quantity theory of money; Pasinetti Rule; Kansas City Rule; Smithin Rule (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-11240-9_3

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DOI: 10.1007/978-3-031-11240-9_3

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