Monetary Policy Rules Or Discretion

808 Words2 Pages

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.

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