Working Paper: NBER ID: w24149
Authors: John B. Taylor
Abstract: This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved over time. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the two approaches difficult. History shows that research on policy rules has had an impact on the practice of central banking. Economic research also shows that while central bank independence is crucial for good monetary policy making, it has not been enough to prevent swings away from rules-based policy, implying that policy-makers might consider enhanced reporting about how rules are used in monetary policy. The paper also shows that during the past year there has been an increased focus on policy rules in implementing monetary policy in the United States.
Keywords: No keywords provided
JEL Codes: E52; E58; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| systematic approach to monetary policy (E52) | better economic outcomes (P17) |
| adherence to rules (K40) | improved economic outcomes (O49) |
| central bank independence (E58) | effective monetary policy (E52) |
| central bank independence + adherence to rules (E58) | optimal outcomes (L21) |
| deviations from rules-based policies (E60) | economic downturns (F44) |
| evolution of policy rules incorporating empirical findings (E61) | effective monetary policy (E52) |
| simple rules outperform complex policies (D72) | policy effectiveness (D78) |