Are Rules Made to be Broken?
Discretion and Monetary Policy

ABOUT THE CONFERENCE

The theory and practice of central banking has featured a recurring debate over the costs and benefits of providing the monetary authority with discretion in how to best fulfill its government-mandated objectives. From the gold standard and the Bretton Woods system to the money supply rules of the 1960s and 1970s, the merits of prioritizing a rules-based approach for policymaking have been promoted as an alternative to discretionary policy. The reasons for imposing such constraints have changed over time; for example, the notion that monetary policy contains an inflationary bias which should be mitigated by a rule informed the debate during the late 1970s and the 1980s, but now this argument appears to be outdated. In more recent treatments of optimal monetary policy, discretion can still lead to inefficient outcomes which some type of commitment may overcome. Recently proposed legislation in Congress has picked up on this ongoing debate by asserting that the Federal Reserve should specify the systematic part of its policymaking. Under this approach, the central bank would closely adhere to a predetermined rule, often referred to as the "Taylor rule." The current debate is not about the goals that monetary policy should pursue, but about how monetary policy should be implemented to best achieve these goals. Should the Federal Reserve have discretion in setting its instrument to the level it believes best attains its mandated goals, or should that instrument be either determined or constrained by a preset rule? The purpose of this conference is to place the ongoing debate in the context of current economic theory and practice, especially in light of how monetary policy has been conducted since the Great Recession.