In a rules framework, policy responses must follow a pre-specified plan. It is promising that the ECB and other central banks often use the word “strategy” when describing their own monetary-policy reviews. A strategic approach is necessarily a rules-based approach, which is precisely how the international monetary system should be run. Under a “no bailout, period” rule, all flood victims would be on their own. Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. Supporters of discretion argue that strict rules-based policy cannot account for real-world complexities, such as financial innovation, that can make a previously sound rule unsound. The central bank sets the short-term interest rate based on its policy … This is in stark contrast to orthodox theory which asserts that debt-issuance is an aspect of fiscal policy and is required to finance deficit spending. Term discretionary monetary policy Definition: Explicit changes in the money supply and/or interest rates (monetary policy) that are made with the expressed goal of stabilizing business cycles, reducing unemployment, and/or lowering inflation. The debate over “rules vs. discretion” was a centerpiece of disputes over monetary policy during the 1960s-1980s. Supporters of rules argue that discretionary monetary policy falls prey to information and incentive problems. Rules-based Monetary Policy. Under a discretionary regime, policy-makers would have the flexibility to bail out innocent victims. Based Era—monetary policy, in broad terms, followed a more predictable systemic approach, and economic performance improved dramatically. Buy Find arrow_forward. A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body. 2nd Edition. What are some of the arguments for each? One of the most important contributions to this debate was by … His technical argument centered on the knowledge requirements for implementing discretionary monetary policy. Publisher: OpenStax. Discretionary Monetary Policy. That is why so many distinguished monetary scholars have endorsed this approach. Henry Simons (1936) first raised this issue as a choice between rules and authorities, terms little different than those used in recent discussions. A monetary policy that is based on an expert assessment of the current economic situation. Inflation Targeting (Rule) A monetary policy strategy in which the central bank makes a public commitment to achieving an explicit inflation target and to explaining how its policy actions will achieve that target Tåhe fundamental principles that arise in a fiat monetary system are as follows. Discretionary fiscal policy is a similar type of policy. How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? For instance, the Federal Reserve Bank, European Central Bank, Bank of England, and Reserve Bank of Australia all set interest rates without government interference, but do not adopt a strict rules-based policy stance. HOULD MONETARY POLICY be determined by a legislated rule or by a monetary authority’s discretion? Monetary Policy vs. Fiscal Policy: An Overview . In monetary policy, discretionary policymaking corresponds to the central bank seeking to influence or respond to momentary fluctuations in unemployment and inflation without a long-term strategy. Effective monetary policy is not a question of having enough economic data. Principles of Economics 2e. Steven A. Greenlaw; David Shapiro.
discretionary monetary policy is monetary policy that is based on