The debate about rules versus discretion is longstanding, and it has been affected by a changing economic environment and the evolution of economic thought. How have the various rules suggested for monetary policy changed over time? Have the reasons given for why we might want to tie a central banker's hands evolved? How should we think about discretion? What is the line demarcating a rules-based policy and a discretionary policy when the latter already features a large systematic component? How is the practice of central banking being influenced by the current debate on the optimal conduct of monetary policy? How does the recently proposed Congressional legislation on conducting monetary policy fit into this debate?

In the debate on rules versus discretion, an oft-voiced argument is that when the Federal Reserve has adhered more closely to a monetary policy rule, this approach produced superior macroeconomic out-comes. How compelling is this view? How reliable are the empirical estimates of a monetary policy rule? Were some of the less satisfactory past macroeconomic outcomes related to policymakers' difficulties with assessing unobservable factors, such as the natural rate of interest and potential GDP—an issue that continues to be present under a rules-based policy? Was a policy of low interest rates in the early 2000s potentially detrimental not because it represented a significant deviation from past behavior, but rather because it did not take into account the risks posed to financial stability—another issue that is not necessarily solved by adhering to a rule?

What are the issues that the Federal Reserve would face if it were to explicitly adopt a rules-based policy? How should such rules be chosen? Would a single rule be sufficient or would it be more desirable to benchmark policy against a set of rules? What would be the benefits of specifying a forward-looking rule rather than a backward-looking one? How far is a rules-based approach likely to be from the optimal Ramsey policy? Should a monetary policy rule be specified to incorporate concerns about financial stability? What about factoring in uncertainty and insuring against particular adverse economic outcomes? If the rule is backward-looking, how much emphasis should monetary policy place on forecasting economic activity and inflation? How should a rules-based policy deal with the zero lower bound?

What are the challenges with implementing a rules-based policy? In particular, how should one deal with potentially time-varying parameters in the rules, such as the equilibrium real interest rate? What about those variables which are not directly observable, such as gap variables? To the extent that the weights in the rules are set to approximate optimal outcomes, how should those weights change as our understanding of the economy evolves? Should the central bank be provided with escape clauses under which it can deviate from a predetermined rule? Would the monetary authority ultimately be judged by its adherence to a rule or by whether it achieves its mandated goals by whatever means necessary? Would the adoption of a rules-based approach erode the central bank's independence?