Macroeconomic Policy Rules Versus Discretion: Some Analytical Issues

Abstract

In the extensive literature on the rules versus discretion debate three related, but logically distinct, areas of debate are frequently confused: the active versus passive policy debate, the rules versus discretion debate proper, and the open-loop (i.e. fixed) rule versus closed-loop (i.e. contingent) rule debate. Section 2 of this paper examines the nature of and interrelations between these three areas of debate. In section 3 the contributions of economic analysis to the debate are explored in an apolitical framework, in particular, the arguments for rules proposed by Friedman and Kydland and Prescott are assessed. Section 4 extends this framework to take into account the political dimension and the rules versus discretion debate is viewed as a cost-benefit problem involving both political and economic factors. A general conclusion is that since the rules versus discretion debate is an exercise in political economy, the debate cannot be properly assessed in the sterile apolitical framework of pure economic analysis.

Educational Game on Cryptocurrency Investment: Using Microeconomic Decision Making to Understand Macroeconomics Principles

“…Although the discretionary policy is more flexible, it sacrifices time consistency and might fail to realize the original policy goal. Scholars and policymakers generally have different opinions regarding whether rules or discretion are a better policy choice [2,4,9,18].…”

Aspectos de Política Monetaria en Colombia: un Debate entre las Reglas y la Discrecionalidad

“…Además, la importancia de la credibilidad ha sido identificada por Andersen (1988), quien refuerza la idea de que la credibilidad de la autoridad monetaria es crucial para los efectos de la política económica. También, Sayer (1981) resaltó la importancia que tuvieron para Keynes las instituciones políticas, ya que discutir asuntos de política económica en presencia de vacíos institucionales sería un grave problema. Por tal razón, es importante el fortalecimiento de las instituciones políticas que brindan soporte a las distintas discusiones sobre política monetaria.…”

Macroeconomic Policy Analysis

“…For example standard formal analysis provides, at best, limited insights into Central Bank independence, the operation of monetary and fiscal policy under the European Monetary Union, alternative monetary standards and targetting regimes, and international coordination of macroeconomic policies. This gulf is well illustrated by comparing the relatively narrow insights provided by formal analysis with more wide-ranging discussions of these issues written from a more practical perspective (see, for example, Bean, 1984;West, 1986;Fforde, 1983;Buiter and Marston, 1985;Sayer, 1981;Swinburne and Castello-Branco, 1991 ;Giavazzi, Micossi and Miller, 1988). One potential reason for the sterility of debates about macroeconomic policy is that opposing sides in the debate are articulating different basic value judgements.…”