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

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  • Philip Arestis

    ()
    (Department of Land Economy, University of Cambridge)

  • Alexander Mihailov

    ()
    (Department of Economics, University of Reading)

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.

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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series Economic Analysis Research Group Working Papers with number earg-wp2007-13.

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Length: 30 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:rdg:eargwp:earg-wp2007-13

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Keywords: optimal monetary policy; flexible rules; constrained discretion; central bank independence; inflation targeting;

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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.

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