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

  • JOHN B. TAYLOR

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

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  1. 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.
  2. Rudiger Ahrend & Boris Cournède & Robert W.R. Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
  3. Jarociński, Marek & Smets, Frank, 2008. "House Prices and the stance of Monetary Policy," Working Paper Series 0891, European Central Bank.
  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. 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.
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