Working Paper: NBER ID: w24135
Authors: Frederic S. Mishkin
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. Monetary policy discretion can be made more rule-like, by 1) adopting a nominal anchor such as an inflation target, 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.
Keywords: Monetary Policy; Discretion; Rules; Inflation Targeting
JEL Codes: E5; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adoption of a nominal anchor (F31) | improved economic stability (E63) |
| constrained discretionary regime (H61) | stabilization of inflation and output (E63) |
| effective communication of monetary policy reaction process (E52) | stabilization of expectations and economic outcomes (E63) |
| constrained discretion (D10) | mitigates time-inconsistency problem (D15) |
| absence of a constraint (D10) | deviation from optimal long-run plans (D51) |
| deviation from optimal long-run plans (D51) | higher inflation in the long run (E31) |