What is a rule-based policy?

Rules-based monetary policy gives a central bank a strict set of guidelines that dictate its future actions. For example, a rule-based policy could require a central bank to undertake expansionary or contractionary policies to maintain a particular price level.

What is rule-based monetary policy?

A mandate from elected officials to target inflation, for example, is creating a rule for the central bank. But this rule is about the target or goal of monetary policy and gives some discretion to the central bank about how to meet that goal. Predictability is the goal, but at a different level.

What is meant by rules vs discretion in monetary policy?

discretion… In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. Conversely, monetarists propose a tight, fixed rule to ensure price stability. More generally, policy tools that are based on rules leave less room for policy error. …

What is rule and discretion?

Policy can be conducted by rules or discretion. Rules offer time consistency—the outcome demanded by the public in the short run is consistent with the outcome desired in the long run. Discretion may better serve the public interest when the environment is uncertain and policy-maker pronouncements are believable.

How is macroeconomic policy in a world economy?

Macroeconomic Policy in a World Economy. Published in the Journal or Economic Perspectives, this paper presents a general framework for monetary policy analysis within which the multicountry model takes an explicit form. The framework emphasizes financial market prices (short term interest rates, long term interest rates,…

What makes a monetary policy rule a rule?

It should be noted that a binding rule does not need to be a precise mathematical formula. A good monetary policy rule specifies plans of action, depending on contingencies, on which the central bank cannot later renege. The empirical literature on rules versus discretion in monetary policy is enormous.

What do you mean by macroeconomic stabilization policy?

Macroeconomic stabilization policy, which attempts to keep the money supply growing at a rate that does not result in excessive inflation, and attempts to smooth out the business cycle. Trade policy, which refers to tariffs, trade agreements and the international institutions that govern them.

How are monetary policy rules used in the ECB?

The Robustness and Efficiency of Monetary Policy Rules as Guidelines for the ECB (1999). This paper simulates the multicountry model stochastically to see whether inflation forecast targeting rules or exchange rate oriented policy rules work better than my simple rule as a guideline for the European Central Bank.

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