Advanced Search
MyIDEAS: Login

Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy

Contents:

Author Info

  • P Arestis
  • A Mihailov

Abstract

This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under 'normal' circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in 'exceptional' circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of 'rules versus discretion' has, thus, reappeared as the synthesis of 'rules cum discretion', in essence as inflation-forecast targeting. But such synthesis is not without major theoretical problems, as we argue in this contribution. Furthermore, the very recent real-world events have made it obvious that the inflation targeting strategy of monetary policy, which rests upon the new consensus paradigm in modern macroeconomics is at best a 'fair weather' model. In the turbulent economic climate of highly unstable inflation, deep financial crisis and world-wide, abrupt economic slowdown nowadays this approach needs serious rethinking to say the least, if not abandoning it altogether. Classification-JEL:

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economicissues.org.uk/Files/209Arestis.pdf
Download Restriction: no

Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 14 (2009)
Issue (Month): 2 (September)
Pages: 27-54

as in new window
Handle: RePEc:eis:articl:209arestis

Contact details of provider:
Postal: Burton Street, Nottingham, NG1 4BU
Web page: http://www.economicissues.org.uk
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Danthine, Jean-Pierre, 1997. "In Search of a Successor to IS-LM," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 135-44, Autumn.
  2. Eijffinger, Sylvester C W & Hoeberichts, Marco, 2002. "Central Bank Accountability and Transparency: Theory and Some Evidence," International Finance, Wiley Blackwell, vol. 5(1), pages 73-96, Spring.
  3. Giuseppe Fontana, 2007. "Why money matters: Wicksell, Keynes, and the new consensus view on monetary policy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(1), pages 43-60, October.
  4. M. Woodford., 2010. "Convergence in Macroeconomics: Elements of the New Synthesis," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 10.
  5. F Alexandre & P Bacao, 2006. "Investment and Non-fundamental Movements in Asset Prices: is there a role for monetary policy?," Economic Issues Journal Articles, Economic Issues, vol. 11(1), pages 65-95, March.
  6. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 47-68, Fall.
  7. Servaas Storm & C. W. M. Naastepad, 2007. "It is high time to ditch the NAIRU," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 29(4), pages 531-554, July.
  8. Giuseppe Fontana & Alfonso Palacio-Vera, 2007. "Are Long-Run Price Stability And Short-Run Output Stabilization All That Monetary Policy Can Aim For?," Metroeconomica, Wiley Blackwell, vol. 58(2), pages 269-298, 05.
  9. Jon Faust & Lars E.O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.).
  10. Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006 95, Money Macro and Finance Research Group.
  11. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
  12. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  13. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  14. D Nocetti, 2007. "Optimal Monetary Policy under Risk and Uncertainty," Economic Issues Journal Articles, Economic Issues, vol. 12(1), pages 93-108, March.
  15. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-70, December.
  16. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
  17. Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  18. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.
  19. Robert J. Barro & David B. Gordon, 1984. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  20. Alexander Mihailov, 2005. "Operational Independence, Inflation Targeting and UK Monetary Policy," Economics Discussion Papers 602, University of Essex, Department of Economics.
  21. N. Gregory Mankiw, 1991. "A Quick Refresher Course in Macroeconomics," NBER Working Papers 3256, National Bureau of Economic Research, Inc.
  22. N. Gregory Mankiw, 2006. "The Macroeconomist as Scientist and Engineer," Harvard Institute of Economic Research Working Papers 2121, Harvard - Institute of Economic Research.
  23. Forder, James, 1998. "Central Bank Independence--Conceptual Clarifications and Interim Assessment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 307-34, July.
  24. Söderström, Ulf & Söderlind, Paul & Vredin, Anders, 2002. "New-Keynesian Models and Monetary Policy: A Reexamination of the Stylized Facts," Working Paper Series in Economics and Finance 511, Stockholm School of Economics, revised 15 Aug 2003.
  25. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  26. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  27. Alvaro Angeriz & Philip Arestis, 2007. "Assessing Inflation Targeting Through Intervention Analysis," Money Macro and Finance (MMF) Research Group Conference 2006 87, Money Macro and Finance Research Group.
  28. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  29. Benjamin M. Friedman, 2006. "The Greenspan Era: Discretion, Rather than Rules," American Economic Review, American Economic Association, vol. 96(2), pages 174-177, May.
  30. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  31. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  32. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  33. S. G. B Henry & A. R. Pagan, 2004. "The Econometrics of the New Keynesian Policy Model: Introduction," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 581-607, 09.
  34. Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc.
  35. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  36. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  37. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981.
  38. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  39. Giuseppe Fontana, 2006. "“Mr Keynes and the ‘Classics’” Again: A Methodological Enquiry," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(2), pages 161-174, June.
  40. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  41. Jesús Crespo Cuaresma & Ernest Gnan, 2007. "The natural rate of interest: which concept? which estimation method? which policy conclusions?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 29(4), pages 667-688, July.
  42. Alvaro Angeriz & Philip Arestis, 2007. "Monetary policy in the UK," Cambridge Journal of Economics, Oxford University Press, vol. 31(6), pages 863-884, November.
  43. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  44. Benjamin M. Friedman, 2006. "The Greenspan Era: Discretion, Rather Than Rules," NBER Working Papers 12118, National Bureau of Economic Research, Inc.
  45. Herrendorf, Berthold, 1998. "Inflation Targeting as a Way of Precommitment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 431-48, July.
  46. King, Robert G. & Plosser, Charles I., 2005. "The econometrics of the New Keynesian price equation," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1059-1060, September.
  47. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
  48. Alvaro Angeriz & Philip Arestis, 2006. "Has inflation targeting had any impact on inflation?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(4), pages 559-571, July.
  49. Nancy L. Stokey, 2003. ""Rules vs. Discretion" After Twenty-Five Years," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 9-64 National Bureau of Economic Research, Inc.
  50. Philip Arestis & Alexander Mihailov, 2008. "Classifying Monetary Economics: Fields and Methods from Past to Future," Economics & Management Discussion Papers em-dp2008-64, Henley Business School, Reading University.
  51. repec:fth:harver:1470 is not listed on IDEAS
  52. Arestis, Philip & Caporale, Guglielmo Maria & Cipollini, Andrea, 2002. "Does Inflation Targeting Affect the Trade-Off between Output Gap and Inflation Variability?," Manchester School, University of Manchester, vol. 70(4), pages 528-45, Special I.
  53. Philip Arestis & Malcolm Sawyer, 2004. "On the Effectiveness of Monetary Policy and of Fiscal Policy," Review of Social Economy, Taylor and Francis Journals, vol. 62(4), pages 441-463.
  54. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  55. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  56. James Forder, 2001. "The Theory of Credibility and the Reputation-bias of Policy," Review of Political Economy, Taylor and Francis Journals, vol. 13(1), pages 5-25.
  57. Archer, David J., 1997. "The New Zealand approach to rules and discretion in monetary policy," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 3-15, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Etienne Farvaque & Muhammad Azmat Hayat & Alexander Mihailov, 2011. "Who Supports the ECB? Evidence from Eurobarometer Survey Data," Economics & Management Discussion Papers em-dp2011-04, Henley Business School, Reading University.
  2. Philip Arestis & Alexander Mihailov, 2008. "Classifying Monetary Economics: Fields and Methods from Past to Future," Economics & Management Discussion Papers em-dp2008-64, Henley Business School, Reading University.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eis:articl:209arestis

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dan Wheatley).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.