Monetary Policy

Why Monetary Policy should be made by Rule Rather than Discretion

Introduction: Monetary policy involves the regulation of the money supply and of interest rates by a central bank. In the United States, monetary policy is determined by the Federal Reserve Board. The goals of the Federal Reserve Board (the Fed) are to encourage economic growth, control inflation, reduce unemployment to acceptable levels and stabilize the exchange rate between the U.S. dollar and foreign currencies in the foreign exchange marketplace. Monetary policy is one of the two ways the government can impact the economy. By regulating the amount of money in circulation the Federal Reserve can affect the amount of money that is spent by consumers and businesses.

Opinion: In an ideal world, monetary policy would be made by rule rather than by discretion. The key to using decision rules involves the identification of key relationships that, taken together, provide a useful approximation of the dynamics of the economy. Such an approximation would be the basis for statistical models that the Federal Reserve uses to assess the likely outcome of monetary policy decisions and determine the appropriate interventions by the Fed.

There are certain rules the Fed should accept according to Kenneth Kuttner writing in Review (Federal Reserve Bank of Saint Louis). One such rule involves inflation targeting. A non-contingent or unconditional rule represents an inflexible commitment to a stated rule such as this:

Related Essays

US Monetary Policy In order to discuss how monetary policy should be conducted in the US it is first necessary to briefly summarize the unique power of the Federal Reserve and .... (1450 6 )

Monetary Policy Report .... The Monetary Policy Report to the Congress echoed Mr. Greenspan's sentiments, pointing to a rise in employment and "buoyant" household spending (Monetary .... (489 2 )

Monetary Policy According to Fred Weston and Eugene Brigham in their book Essentials of Managerial Finance, monetary policy involves the regulation of the money supply and of .... (852 3 )

US FEDERAL RESERVE MONETARY POLICY US FEDERAL RESERVE MONETARY POLICY Characterization of the State of the Economy The Board of Governors of Federal Reserve (2004), in the most recent Monetary .... (678 3 )

Monetary Policy .... Making a distinction between nominal and real interest rates adds uncertainty to the effect on monetary policy. Monetary policy .... (278 1 )

de policy-makers with useful information for the conduct of monetary policy but it is clear that more research is needed to determine how much weight policy-makers should assign to the information yielded by simple rules. They add that banks must contend with several sources of uncertainty when setting monetary policy. One means of accounting for uncertainty and of mitigating its impact, is to incorporate projections from a variety of different models into the decision-making process. The simpler the model and the simpler the rules, the faster models can be created, examined, modified and evaluated by policymakers. In other words, simple rules are used to create models that are not as sophisticated as they might be, but nevertheless yield valuable insights for policymakers (Cote, Lam, St-Amant 27). An article by Michael Tagera in Social Science Journal contains an argument against monetary policy rules. He writes that definitive rules should be rejected because they run monetary policy on autopilot and end policymaking. Rules put the country's monetary stance into predetermined paths irrespective of circumstances. Tagera worries that when new problems arise that cannot be anticipated by predetermined rules, and changes in ci

Category: Government - M