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Rules versus discretion in monetary policy historically contemplated

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  • Glasner, David

Abstract

Monetary policy rules are attempts to cope with the implications of having a medium of exchange whose value exceeds its cost of production. Two classes of monetary rules can be identified: (1) price rules that target the value of money in terms of a real commodity, e.g., gold, or in terms of some index of prices, and (2) quantity rules that target the quantity of money in circulation. Historically, price rules, e.g. the gold standard, have predominated, but the Bank Charter Act of 1844 imposed a quantity rule as an adjunct to the gold standard, because the gold standard had performed unsatisfactorily after being restored in Britain at the close of the Napoleonic Wars. A quantity rule was not proposed independently of a price rule until Henry Simons proposed a constant money supply consisting of government-issued fiat currency and deposits issued by banks operating on a 100% reserve basis. Simons argued that such a plan would be ideal if it could be implemented because it would deprive the monetary authority of any discretionary decision-making power. Nevertheless, Simons concluded that such a plan was impractical and supported a price rule to stabilize the price level. Simons's student Milton Friedman revived Simons's argument against discretion and modified Simons's plan for 100% reserve banking and a constant money supply into his k% rule for monetary growth. This paper examines the doctrinal and ideological origins and background that lay behind the rules versus discretion distinction.

Suggested Citation

  • Glasner, David, 2017. "Rules versus discretion in monetary policy historically contemplated," Journal of Macroeconomics, Elsevier, vol. 54(PA), pages 24-41.
  • Handle: RePEc:eee:jmacro:v:54:y:2017:i:pa:p:24-41
    DOI: 10.1016/j.jmacro.2017.05.004
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    1. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    2. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    3. Bennett T. McCallum, 1987. "The case for rules in the conduct of monetary policy: a concrete example," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 10-18.
    4. repec:eee:jmacro:v:54:y:2017:i:pa:p:12-23 is not listed on IDEAS
    5. Laidler, David E, 1988. "British Monetary Orthodoxy in the 1870s," Oxford Economic Papers, Oxford University Press, vol. 40(1), pages 74-109, March.
    6. Milton Friedman, 1951. "Commodity-Reserve Currency," Journal of Political Economy, University of Chicago Press, vol. 59, pages 203-203.
    7. David Glasner, 1992. "The Real-Bills Doctrine in the Light of the Law of Reflux," History of Political Economy, Duke University Press, vol. 24(4), pages 867-894, Winter.
    8. Henry C. Simons, 1936. "Rules versus Authorities in Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 44, pages 1-1.
    9. David Glasner, 1989. "On Some Classical Monetary Controversies," History of Political Economy, Duke University Press, vol. 21(2), pages 201-229, Summer.
    10. Sandeep Mazumder & John H. Wood, 2013. "The Great Deflation of 1929–33: it (almost) had to happen," Economic History Review, Economic History Society, vol. 66(1), pages 156-177, February.
    11. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    12. 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 473-491, June.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Cleaning Up After Burns’s Mess
      by David Glasner in Uneasy Money on 2019-05-09 04:24:44

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    Cited by:

    1. Samuel Demeulemeester, 2018. "The 100% money proposal and its implications for banking: the Currie–Fisher approach versus the Chicago Plan approach," Post-Print hal-01830363, HAL.
    2. repec:ejw:journl:v:16:y:2019:i:1:p:130-145 is not listed on IDEAS

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