Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy
AbstractThis 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 InfoPaper provided by Henley Business School, Reading University in its series Economics & Management Discussion Papers with number em-dp2007-53.
Length: 30 pages
Date of creation: Oct 2007
Date of revision:
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optimal monetary policy; flexible rules; constrained discretion; central bank independence; inflation targeting;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-02 (All new papers)
- NEP-CBA-2008-02-02 (Central Banking)
- NEP-MAC-2008-02-02 (Macroeconomics)
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- 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.
- 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.
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