Premium
Improving the use of discretion in monetary policy
Author(s) -
Mishkin Frederic S.
Publication year - 2018
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12337
Subject(s) - discretion , monetary policy , economics , inflation (cosmology) , process (computing) , macroeconomics , monetary economics , inflation targeting , computer science , political science , law , physics , theoretical physics , operating system
Abstract This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which have serious shortcomings. Rather, it can choose a constrained discretionary regime that has rule‐like attributes. To make monetary policy discretion more rule‐like, it can be improved by (1) adopting a nominal anchor such as an inflation target, a monetary‐policy strategy that has proved to be very successful in recent years, and (2) communication of a monetary‐policy reaction process, especially through data‐based forward guidance, in which the monetary‐policy authorities describe how the future policy path will change as economic circumstances change.