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Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy

  • Philip Arestis

    ()

    (Department of Land Economy, University of Cambridge)

  • Alexander Mihailov

    ()

    (Department of Economics, University of Reading)

This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting.

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Paper provided by Henley Business School, Reading University in its series Economics & Management Discussion Papers with number em-dp2007-53.

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Length: 30 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:rdg:emxxdp:em-dp2007-53
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