Rules Vs. Discretion in Monetary Policies
Many economists have argued whether using Rules in framing monetary policies is better than the discretion of the policy maker and vice versa. The rules vs. discretion debate was the mainstream argument of monetary policy framing in the 1960s to the 1980s and there is still no single opinion on what is better. However, some economists like John B. Taylor are inclined towards using rules rather than discretion. Taylor said, "You do not prevent bailouts by giving the government more power to intervene in a discretionary manner. You prevent bailouts by requiring adequate capital based on simple, enforceable rules and by making it possible for failing firms to go through bankruptcy without causing disruption to the financial system and the economy," indicating a clear preference over rules rather than discretion in monetary policies.
Economists and policy makers strive to formulate monetary policies using Rules but allowing scope for discretion so as to adjust the policies appropriate to the current economic situation so as to make these policies more effective.
The Friedman's k-percent rule, however, does not allow any interference from central banks in framing the monetary policy, as Friedman believed that discretion would be counterproductive and could lead to increased levels of inflation instead of controlling it. The K-percent rule does not allow any discretion in framing of monetary policies and believes in strict adherence to the proposed rule. This has caused many economists to criticise Freidmans k-percent rule.
Read more about this topic: Friedman's K-percent Rule
Famous quotes containing the words rules, discretion, monetary and/or policies:
“Now for civil service reform. Legislation must be prepared and executive rules and maxims. We must limit and narrow the area of patronage. We must diminish the evils of office-seeking. We must stop interference of federal officers with elections. We must be relieved of congressional dictation as to appointments.”
—Rutherford Birchard Hayes (1822–1893)
“But the house of the prudent countryman will be, of course, a place of honest manners; and Demeter Thesmophoros is the guardian of married life, the deity of the discretion of wives. She is therefore the founder of civilised order.”
—Walter Pater (1839–1894)
“In our time, the curse is monetary illiteracy, just as inability to read plain print was the curse of earlier centuries.”
—Ezra Pound (1885–1972)
“We urgently need a debate about the best ways of supporting families in modern America, without blinders that prevent us from seeing the full extent of dependence and interdependence in American life. As long as we pretend that only poor or abnormal families need outside assistance, we will shortchange poor families, overcompensate rich ones, and fail to come up with effective policies for helping families in the middle.”
—Stephanie Coontz (20th century)