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Monetary Policy Rules Work and Discretion Doesn't: A Tale of Two Eras

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  • JOHN B. TAYLOR

Abstract

This lecture examines monetary policy during the past three decades. It documents two contrasting eras: first a Rules-Based Era from 1985 to 2003 and second an Ad Hoc Era from 2003 to the present. During the Rules-Based Era, monetary policy, in broad terms, followed a predictable systemic approach, and economic performance was generally good. During the Ad Hoc Era monetary policy is best described as a “discretion of authorities” approach, and economic performance was decidedly poor. By considering alternative explanations of this policy-performance correlation and examining corroborating evidence, the paper concludes that rules based policies have clear advantages over discretion.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00521.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 6 (09)
Pages: 1017-1032

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:6:p:1017-1032

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Johannes C. Stroebel & John B. Taylor, 2009. "Estimated Impact of the Fed’s Mortgage-Backed Securities Purchase Program," NBER Working Papers 15626, National Bureau of Economic Research, Inc.
  2. Ahrend, Rudiger, 2008. "Monetary Ease: A Factor behind Financial Crises? Some Evidence from OECD Countries," Economics Discussion Papers 2008-44, Kiel Institute for the World Economy.
  3. Marek Jarocinski & Frank R. Smets, 2008. "House prices and the stance of monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 339-366.
  4. George A. Kahn, 2010. "Taylor rule deviations and financial imbalances," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 63-99.
  5. Rudiger Ahrend & Boris Cournède & Robert W.R. Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
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Cited by:
  1. Frank A.G. den Butter & Mathieu L.L. Segers, 2014. "Prospects for an EMU between Federalism and Nationalism," Tinbergen Institute Discussion Papers 14-008/VI, Tinbergen Institute.
  2. Mohammed Dore & Roelof Makken & Erik Eastman, 2013. "The Monetary Transmission Mechanism, Non-residential Fixed Investment and Housing," Atlantic Economic Journal, International Atlantic Economic Society, vol. 41(3), pages 215-224, September.
  3. Arizmendi, Luis-Felipe, 2013. "An extended model of currency options applicable as policy tool for central banks with inflation targeting and dollarized economies," MPRA Paper 52880, University Library of Munich, Germany, revised 15 Apr 2013.
  4. Miguel Casares & Jesús Vázquez, 2012. "The Great Moderation of Inflation: a structural analysis of recent U.S. monetary business cycles," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 1215, Departamento de Economía - Universidad Pública de Navarra.
  5. Ehsan U. Choudhri & Lawrence L. Schembri, 2013. "A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s: The Roles of Monetary and Financial Stability Policies," Working Paper Series 44_13, The Rimini Centre for Economic Analysis.
  6. Otmar Issing, 2013. "A New Paradigm for Monetary Policy?," International Finance, Wiley Blackwell, vol. 16(2), pages 273-288, 06.
  7. Julio J. Rotemberg, 2013. "Shifts in US Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 65-86, Fall.
  8. John B. Taylor, 2013. "The Effectiveness of Central Bank Independence Versus Policy Rules," Discussion Papers 12-009, Stanford Institute for Economic Policy Research.

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