Given the coordination, flow of information, analysis, and communication required, macro-prudential frameworks will have weaknesses that make it hard to implement policy. Rules vs. discretion Ever since the beginning of the Financial Crisis, Central Bankers all around the world have been acting highly discretionary. S. T. SAYER Department of Economics, University of Edinburgh ABSTRACT In the extensive literature on the rules versus discretion debate three related, but logically distinct, areas of debate are frequently confused: the active versus passive policy debate, the rules versus discretion debate proper, and As Friedrich Hayek put it in The Road to Serfdom in 1944, Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule … Any discussion of rules and ‘See Simons (1936), p. 33~ ‘See Friedman (1959) and Lucas (1980). Dynamic inconsistency: The basic example Until 1977 it appeared that discretion dominated rules, since any good rule could be adopted by discretion. The debate about rules vs. discretion in monetary policy has a long and interesting history, summarized by Argy (1988) and Carlson (1988). Downloadable (with restrictions)! The article discusses the fundamental principles of macroeconomic policy. rules couch their arguments in the Kydland-Prescott framework. Macroeconomic Policy: Rules vs Discretion. Economists broadly categorize policy-making frameworks as either rules or discretion. Rules vs. discretion… In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. ‘See Wallace (19Th. It traces the development of macroeconomic policy ideas, and, particularly, the transition cycle from adhering to strictly defined rules to free discretion and vice versa – back to restricting the freedom of implementation of macroeconomic policy instruments. And The FED, for example, pursued massive amounts of Quantitative Easing (QE) over the last few years, that is … Rules, Discretion, and Macro-Prudential Policy* Prepared by Itai Agur and Sunil Sharma March 2013 Abstract The paper examines the implementation of macro-prudential policy. Conversely, monetarists propose a tight, fixed rule to ensure price stability. 38 The concept of dynamic inconsistency, brought to macroeconomics in the rules versus discretion context [Kydland and Prescott (1977)] completely changed the debate. In both undergraduate and graduate economics, when the macro classes I took arrived at monetary policy, they always took the time to go over the rules vs discretion debate. There is also substantial litera-ture on the implementation of monetary policy and the im-plications for rules, much of it in this Review Goodhart This debate, while sexy in academia, has had — as far as I can tell — zero impact on the real world. The case for rules over discretion is not only an economic case. 2.7 Other interpretations of “rules versus discretion” The inflation bias previously discussed is illustrative of a more general issue of “ rules versus discretion ” and of flexibility versus rigidity in monetary policy. The article discusses the fundamental principles of macroeconomic policy. Discretion The Wrong Choice Could Open the Floodgates Policy-makers do not want people to build homes in floodplains. In a rules frame-[10 ] By Jason J. Buol and Mark D. Vaughan Rules vs. Alberto Alesina, Andrea Stella, in Handbook of Monetary Economics, 2010. DISCRETION Discussions of rules and discretion sometimes use seemingly similar) but not identical, defini~ tions of the terms.
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