Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras

Thursday, March 1, 2012

Economics Working Paper WP12106

Abstract:
This lecture examines monetary policy during the past three decades. If documents two contrasting eras: first a Rules-Based Era from 1985 to 2003 and second an Ad Hoc Era from 2003 to the present. During the Rules-Based Era, monetary policy, in broad terms, followed a predictable systemic approach, and economic performance was generally good. During the Ad Hoc Era monetary policy is best described as a “discretion of authorities” approach, and economic performance was decidedly poor. By considering alternative explanations of this policy-performance correlation and examining corroborating evidence, the paper concludes that rules based policies have clear advantages over discretion.

Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras