2.7 Other interpretations of “rules versus discretion” The inflation bias previously discussed is illustrative of a more general issue of “ rules versus discretion ” and of flexibility versus rigidity in monetary policy. 38 The concept of dynamic inconsistency, brought to macroeconomics in the rules versus discretion context [Kydland and Prescott (1977)] completely changed the debate. This debate, while sexy in academia, has had — as far as I can tell — zero impact on the real world. ‘See Wallace (19Th. rules couch their arguments in the Kydland-Prescott framework. It traces the development of macroeconomic policy ideas, and, particularly, the transition cycle from adhering to strictly defined rules to free discretion and vice versa – back to restricting the freedom of implementation of macroeconomic policy instruments. Economists broadly categorize policy-making frameworks as either rules or discretion. Given the coordination, flow of information, analysis, and communication required, macro-prudential frameworks will have weaknesses that make it hard to implement policy. Rules vs. discretion Ever since the beginning of the Financial Crisis, Central Bankers all around the world have been acting highly discretionary. In both undergraduate and graduate economics, when the macro classes I took arrived at monetary policy, they always took the time to go over the rules vs discretion debate. The debate about rules vs. discretion in monetary policy has a long and interesting history, summarized by Argy (1988) and Carlson (1988). Macroeconomic Policy: Rules vs Discretion. S. T. SAYER Department of Economics, University of Edinburgh ABSTRACT In the extensive literature on the rules versus discretion debate three related, but logically distinct, areas of debate are frequently confused: the active versus passive policy debate, the rules versus discretion debate proper, and Downloadable (with restrictions)! Rules, Discretion, and Macro-Prudential Policy* Prepared by Itai Agur and Sunil Sharma March 2013 Abstract The paper examines the implementation of macro-prudential policy. Rules vs. discretion… In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. In a rules frame-[10 ] By Jason J. Buol and Mark D. Vaughan Rules vs. There is also substantial litera-ture on the implementation of monetary policy and the im-plications for rules, much of it in this Review Goodhart Discretion The Wrong Choice Could Open the Floodgates Policy-makers do not want people to build homes in floodplains. The case for rules over discretion is not only an economic case. Alberto Alesina, Andrea Stella, in Handbook of Monetary Economics, 2010. And The article discusses the fundamental principles of macroeconomic policy. The article discusses the fundamental principles of macroeconomic policy. As Friedrich Hayek put it in The Road to Serfdom in 1944, Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule … Conversely, monetarists propose a tight, fixed rule to ensure price stability. The FED, for example, pursued massive amounts of Quantitative Easing (QE) over the last few years, that is … DISCRETION Discussions of rules and discretion sometimes use seemingly similar) but not identical, defini~ tions of the terms. 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rules vs discretion macroeconomics

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