2.7 Other interpretations of “rules versus discretion” The inflation bias previously discussed is illustrative of a more general issue of “ rules versus discretion ” and of flexibility versus rigidity in monetary policy. The introduction of the notion of dynamic inconsistency made a stronger case for rules, the final sections analyze tine case for rules rather than discretion in the light of recent game theoretic approaches to policy analysis. Policy can be conducted by rules or discretion. ... Let's start with the monetarist and new classical arguments in support of policy rules for the conduct of monetary policy and balancing the budget. The debate of rules versus discretion in economic policy has its origin in the writings of Henry Simons at the University of Chicago. Rules Versus Discretion . Finally, we introduce an \optimal" timeless policy rule based on Blake (2001), Jensen and McCallum (2002) and Jensen (2003). Although the classic rules versus discretion debate was usually carried on as if the only policy rule were the constant growth rate rule for the money supply, feedback rules in which the money supply responds to changes in un- employment or inflation are also policy rules. Monetary policy is often only noticeable when the Federal Reserve gets it wrong, as it has several times in recent history. The next section explores these … rules versus discretion To what extent should monetary policy be governed by a predetermined rule versus chosen at the discretion of a policy maker? The time-(in)consistency literature, launched bu Kydland and Prescott (1977), shows that discretion-based solutions would be the first-best in terms of agents’ utility, but they are not time-consistent. Rules vs. Rules can directly limit the actions taken by a monetary authority. Sound monetary policy is essential for strong economic growth and stability. would have a discretionary monetary policy. The Taylor rule is one kind of targeting monetary policy used by central banks.The Taylor rule was proposed by the American economist John B. Taylor, economic adviser in the presidential administrations of Gerald Ford and George H. W. Bush, in 1992 as a central bank technique to stabilize economic activity by setting an interest rate.. Monetary-policy rules are attempts to cope with the implications of having a medium of exchange whose value exceeds its cost of production. Over time more ideas for monetary policy rules have been suggested and the design of rules has improved greatly. Read John Taylor’s chapter “National and International Monetary Reform” in. Proponents of central bank discretion argue that a simple monetary policy rule is incompatible with the complexity of … The extent to which individual responses to household surveys are protected from discovery by outside parties depends... © 2020 National Bureau of Economic Research. versus discretion” as explained in Taylor and Williams (2011); it was “rules versus chaotic monetary policy” whether the chaos was caused by policy makers’ discretion or simply exogenous shocks like gold discoveries or shortages. In fact, strategic responses of rational, utility-maximising agents lead to an ex-post sub-optimal arrangement; rules ensure that – ex-p… The introduction of the notion of dynamic inconsistency made a stronger case for rules, the final sections analyze tine case for rules rather than discretion in the light of recent game theoretic approaches to policy analysis. 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