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

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  • John B. Taylor

    () (Stanford Institute for Economic Policy Research)

Abstract

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.

Suggested Citation

  • John B. Taylor, 2012. "Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras," Discussion Papers 11-019, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:11-019
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    1. Marek Jarocinski & Frank Smets, 2008. "House prices and the stance of monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 339-366.
    2. 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.
    3. Rudiger Ahrend & Boris Cournède & Robert Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
    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. Ahrend, Rudiger, 2010. "Monetary ease: A factor behind financial crises? Some evidence from OECD countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-30.
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