Working Paper: NBER ID: w2518
Authors: Stanley Fischer
Abstract: This paper examines the case for rules rather than discretion in the conduct of monetary policy, from both historical and analytic perspectives. The paper starts with the rules of the game under the gold standard. These rules were ill-defined and not adhered to; active discretionary policy was pursued to defend the gold standard -- but the gold standard came closer to a regime of rules than the current system. The arguments for rules in general developed by Milton Friedman are described mo appraised; alternative rules including the constant money growth ratio rule, interest rate rules, nominal GNP targeting, and price level rules are analyzed. Until 1977 the general argument for monetary rules suffered from the apparent dominance of discretion: if a particular monetary policy was desirable, it could always 09 adopted by discretion. 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.
Keywords: monetary policy; rules; discretion; gold standard; dynamic inconsistency
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adoption of rules in monetary policy (E52) | more stable economic outcomes (P17) |
| discretion in monetary policy (E60) | destabilizing shifts in monetary policy (E63) |
| precommitment by monetary authorities (E58) | enhance economic performance (O57) |
| rules in monetary policy (E52) | mitigate the risks of discretionary policy (E60) |