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Improving the use of discretion in monetary policy

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  • Frederic S. Mishkin

Abstract

This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which have serious shortcomings. Rather, it can choose a constrained discretionary regime that has rule‐like attributes. To make monetary policy discretion more rule‐like, it can be improved by (1) adopting a nominal anchor such as an inflation target, a monetary‐policy strategy that has proved to be very successful in recent years, and (2) communication of a monetary‐policy reaction process, especially through data‐based forward guidance, in which the monetary‐policy authorities describe how the future policy path will change as economic circumstances change.

Suggested Citation

  • Frederic S. Mishkin, 2018. "Improving the use of discretion in monetary policy," International Finance, Wiley Blackwell, vol. 21(3), pages 224-238, December.
    • Handle: RePEc:bla:intfin:v:21:y:2018:i:3:p:224-238
    DOI: 10.1111/infi.12337
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    Cited by:

    1. Levieuge, Grégory & Lucotte, Yannick & Pradines-Jobet, Florian, 2021. "The cost of banking crises: Does the policy framework matter?," Journal of International Money and Finance, Elsevier, vol. 110(C).
    2. Pablo Garcia, 2021. "Learning, expectations and monetary policy," BCL working papers 153, Central Bank of Luxembourg.
    3. Albulenë Kastrati, 2022. "Paradox of Excess Liquidity in European Emerging and Transition Economies," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(1), pages 79-114.

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