Gary Fortner
04.07.14
Dr. Amanda Wilsker
Macroeconomics
Monetary Policy: Rules or Discretion?
In an economy recently plagued with housing market crashes and financial crisis, we can easily see the vital functions that a monetary policy has on anticipating and preventing instability in our economy. Understanding how monetary policy works and how it’s affected by either rules or discretion is crucial, and all aspects must be taken into account to establish the most effective choice for our economy.
Monetary policy is an extremely valuable guideline for our economy. Small changes in the money supply can affect the price level, interest rates and almost all aspects of the macroeconomic world. When looking at monetary policy, understanding the variables of each argument can help us determine a more extensive view of each policy.
Using the Rule approach in monetary policy infers that, “the policy instruments of the central bank would be set according to some simple and publicly announced formula, with little or no scope for modification or discretionary action on the part of policymakers” (Bernanke). Therefore, in the context of describing a rule, it’s merely a restriction that is placed in such a way that it limits the authorities discretion of monetary actions. The “K-Percent Rule”, a famous proposal by the most prominent advocate of using rules in monetary policy states, “the central bank would be charged with ensuring that some specified measure of the nation money supply increase by a fixed percentage each year, irrespective of broader economic conditions” (Bernanke). Although this rule never came into effect, it’s a great example to show a rule-based policy that would be put into place, which could not be altered by discre...
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...ay where the unpredictability outweighs the predictability. Accounting for these improbable scenarios is something that a strict rule based monetary policy cannot attest to. In the past, the rule-based policy has been beneficial, but as our world increases forward I am becoming more of an advocate towards discretional monetary policies.
Bernanke, Ben S. "FRB Speech: Bernanke--Constrained Discretion and Monetary Policy--February 3, 2003." FRB Speech: Bernanke--Constrained Discretion and Monetary Policy--February 3, 2003. N.p., 03 Feb. 2003. Web. 10 Apr. 2014.
Dwyer, Gerald P., Jr. "Rules and Discretion in Monetary Policy." Http://research.stlouisfed.org/. N.p., May-June 1993. Web. 07 Apr. 2014.
Buol, Jason J., and Mark D. Vaughan. "Publications." Rules vs. Discretion: The Wrong Choice Could Open the Floodgates. The Regional Economist, Jan. 2003. Web. 10 Apr. 2014.
The Web. The Web. 19 Apr 2014. http://law2.umkc.edu/faculty/projects/ftrials/hinckley/hinckley.htm>. Vaughan, Joyce. "
...policy provided more empirical evidences. The responsibility of the monetary policy is proved by them. When the Federal Reserve makes the monetary policy, the authorities should respect the Taylor’s rule.
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
Palmer, Elizabeth A. "The Court and Public Opinion." CQ Weekly 2 Dec. 2000. CQ Weekly. SAGE Publications. Web. 1 Mar. 2000. .
The Economist. The Economist Newspaper, 20 Oct. 2010. Web. The Web. The Web.
Metzler, Allan H. A History of the Federal Reserve, Vol I and II. University Press Books, 2002
Remnick, David. "Into the Clear." The New Yorker (2000): 76-89. Academic Search Premier. Web. 27 Feb. 2012.
Plomin, R & Asbury, K. The ANNALS of the American Academy of Political and Social Science, July 2005; vol. 600, 1:pp.86-98.
Monetary Policy refers to what the government does to influence the amount of money and credit in the economy, what will happen if money and credit affects interest rates and the performance of the economy. This policy ensures the price stability and general trust in the currency.
McCallum, Bennett T. "Crucial issues concerning central bank independence." Journal of Monetary Economics 39.1 (1997): 99-112.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The Social Studies Help Center (n.d.). Monetary and Fiscal Policy. Retrieved November 5, 2011, from http://www.socialstudieshelp.com/eco_mon_and_fiscal.htm
According to federalreserveeducation.org, the term "monetary policy" refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S. economy, (n d). The tools used are diverse but the main ones are:
Smaghi, L. (2009, Aprl 28). Conventional And Unconventional Monetary Policy. Speech at the International Centre for Monetary and Banking Studies (ICMB), Geneva. Retrieved from http://www.bis.org/review/r090429e.pdf
I. INTRODUCTION Monetary Policy is how the Central Bank influences the path it wants the economy to follow. It does this through the control of money supply, using the short term interest rate as the primary instrument to control inflation and economic growth. The objectives of most Central banks are to sustain low unemployment and relatively stable prices, however price stability is the main, medium and longer run goal of monetary policy. An expansionary monetary policy is targeted at increasing the money supply through lowering interest rates with the hope of increasing consumption and investment through easing credit; it is used to combat unemployment in periods of recession. A contractionary policy, however, is used to decrease money supply by increasing the interest rate; it is intended to slow down inflation.