IDEAS home Printed from https://ideas.repec.org/p/fds/dpaper/202602.html

Rules vs. Discretion and the Role of the Central Bank

Author

Listed:
  • Makram El-Shagi

    (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)

  • Florian Gerth

    (Asian Institute of Management, Philippines)

  • Paul Lukuliko Philemon

    (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)

Abstract

We construct a new measure of monetary policy discretion by treating the predictable component of interest-rate changes as rule based and unexpected changes as discretionary. Using newly released high-frequency monetary policy shocks for 20 countries from 2000 to 2024, we document systematic cross-country variation in discretion. Two-way fixed-effects estimates show that greater central-bank independence is associated with higher discretion in developed economies. Event studies around irregular governor turnovers yield little evidence of politically driven discretionary shocks once transitional dynamics are accounted for.

Suggested Citation

  • Makram El-Shagi & Florian Gerth & Paul Lukuliko Philemon, 2026. "Rules vs. Discretion and the Role of the Central Bank," CFDS Discussion Paper Series 2026/2, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    • Handle: RePEc:fds:dpaper:202602
    as

    Download full text from publisher

    File URL: http://cfds.henuecon.education/images/dpaper/WP_2_2026_Central_Bank_Independence.pdf
    File Function: First version, 2026
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. John B. Taylor, 2012. "Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1017-1032, September.
    2. Alisdair McKay & Christian K. Wolf, 2023. "What Can Time‐Series Regressions Tell Us About Policy Counterfactuals?," Econometrica, Econometric Society, vol. 91(5), pages 1695-1725, September.
    3. Walsh, Carl E, 2015. "Goals and Rules in Central Bank Design," Santa Cruz Department of Economics, Working Paper Series qt3md9p6t5, Department of Economics, UC Santa Cruz.
    4. Miguel Acosta, 2023. "A New Measure of Central Bank Transparency and Implications for the Effectiveness of Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 19(3), pages 49-97, August.
    5. Marijn A. Bolhuis & Sonali Das & Bella Yao, 2024. "A New Dataset of High-Frequency Monetary Policy Shocks," IMF Working Papers 2024/224, International Monetary Fund.
    6. Dreher, Axel & Sturm, Jan-Egbert & Haan, Jakob de, 2010. "When is a central bank governor replaced? Evidence based on a new data set," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 766-781, September.
    7. Harald Badinger & Stefan Schiman, 2023. "Measuring Monetary Policy in the Euro Area Using SVARs with Residual Restrictions," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 279-305, April.
    8. Garriga, Ana Carolina, 2025. "Revisiting Central Bank Independence in the World: An Extended Dataset," MPRA Paper 123578, University Library of Munich, Germany.
    9. Krippner, Leo, 2013. "Measuring the stance of monetary policy in zero lower bound environments," Economics Letters, Elsevier, vol. 118(1), pages 135-138.
    10. Harris Dellas & George S. Tavlas, 2022. "Retrospectives: On the Evolution of the Rules versus Discretion Debate in Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 36(3), pages 245-260, Summer.
    11. Carl E. Walsh, 2015. "Day Two Keynote Address: Goals and Rules in Central Bank Design," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 295-352, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Donato Masciandaro, 2026. "Monetary Policy and Taylor Reaction Functions: Business Cycles, Central Bank Governance and Central Bankers’ Preferences," BAFFI CAREFIN Working Papers 26270, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Jonathan Benchimol & André Fourçans, 2017. "Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation," Globalization Institute Working Papers 329, Federal Reserve Bank of Dallas.
    3. Benchimol, Jonathan & Fourçans, André, 2019. "Central bank losses and monetary policy rules: A DSGE investigation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 61, pages 289-303.
    4. Donato Masciandaro, 2023. "How Elastic and Predictable Money Should Be: Flexible Monetary Policy Rules from the Great Moderation to the New Normal Times (1993-2023)," BAFFI CAREFIN Working Papers 23196, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Aguiar-Conraria, Luis & Martins, Manuel M.F. & Soares, Maria Joana, 2018. "Estimating the Taylor rule in the time-frequency domain," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 122-137.
    6. Davig, Troy & Foerster, Andrew, 2023. "Communicating Monetary Policy Rules," European Economic Review, Elsevier, vol. 151(C).
    7. Marcel Fratzscher, 2016. "Rules Versus Human Beings, and the Mandate of the ECB," CESifo Economic Studies, CESifo Group, vol. 62(1), pages 68-87.
    8. Kristin Forbes & Jongrim Ha & M. Ayhan Kose, 2026. "Trade-Offs over Rate Cycles: Activity, Inflation, and the Price Level," NBER Macroeconomics Annual, University of Chicago Press, vol. 40(1), pages 191-277.
    9. Alice Albonico & Guido Ascari & Qazi Haque & Kostas Mavromatis & Andra Smadu, 2026. "Energy and Monetary Policy in the Euro Area," Adelaide Economics Working Papers 2026-07 Classification-E5, Adelaide University, School of Economics.
    10. repec:prg:jnlpep:v:preprint:id:631:p:1-19 is not listed on IDEAS
    11. Conrad, Christian & Hartmann, Matthias, 2014. "Cross-sectional evidence on the relation between monetary policy, macroeconomic conditions and low-frequency inflation uncertainty," Working Papers 0574, University of Heidelberg, Department of Economics.
    12. Fukuda, Shin-ichi, 2025. "Short-run and long-run consequences of unconventional monetary policy in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 77(C).
    13. Kanelis, Dimitrios & Kranzmann, Lars H. & Siklos, Pierre L., 2025. "The financial instability - Monetary policy nexus: Evidence from the FOMC minutes," Discussion Papers 13/2025, Deutsche Bundesbank.
    14. Troy Davig & Andrew Foerster, 2023. "Evaluating Monetary Policy with Inflation Bands and Horizons," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2023(05), pages 1-6, February.
    15. Christian P Pinshi, 2022. "Ciblage des prévisions d'inflation : Un nouveau cadre pour la politique monétaire ?," Working Papers hal-03548273, HAL.
    16. Arshid Hussain PEER & Mirza Allim BAIG, 2023. "Inflation targeting and exchange rate pass-through in India: Lessons from international experience," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(634), S), pages 239-254, Spring.
    17. PINSHI, Christian P., 2022. "Inflation-Forecast Targeting: A New Framework for Monetary Policy?," MPRA Paper 111709, University Library of Munich, Germany.
    18. Conrad, Christian & Hartmann, Matthias, 2019. "On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies," European Journal of Political Economy, Elsevier, vol. 56(C), pages 233-250.
    19. Ambrocio, Gene & Haavio, Markus & McClung, Nigel, 2024. "Monetary policy announcements and sacrifice ratios," Bank of Finland Research Discussion Papers 12/2024, Bank of Finland.
    20. Annika Camehl & Gregor von Schweinitz, 2026. "What Explains International Interest Rate Co‐Movement?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 41(4), pages 343-359, June.
    21. Carl E. Walsh, 2022. "Peter J. Boettke, Alexander William Salter, and Daniel J. Smith: Money and the rule of law: generality and predictability in monetary institutions," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 57(2), pages 78-80, April.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fds:dpaper:202602. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kerstin El-Shagi (email available below). General contact details of provider: https://edirc.repec.org/data/sehencn.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.