Rules versus Discretion
Under a discretionary regime the monetary authority makes no commitments about future money and prices. Then, if surprise inflation conveys economic benefits and if people form expectations rationally, it turns out that the equilibrium involves high and variable monetary growth and inflation. Moreover, since the high rate of inflation is anticipated there are no benefits from inflation surprises. The implementation of an enforced rule can lower the mean rate of inflation while delivering the same average amount of inflation surprises, namely zero. Using these results as a background, the paper discusses alternative monetary rules, including quantity versus price rules and a prescription for stablilizing nominal GNP. This discussion touches on the distinction between positive and normative economics, which leads to a pessimistic appraisal of the role for economists' policy advice.
|Date of creation:||Sep 1984|
|Publication status:||published as Barro, Robert J. "Recent Developments in the Theory of Rules versus Discretion." Economic Journal, Supplement, (1985), pp. 23-37.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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