Question

What is the general case for preferring discretionary monetary policy to a monetary policy rule?

Answer 1

The case for rules rather discretion in the conduct of monetary policy is discussed from historical and analytic perspectives. The rules were set under the gold standard were ill-defined and not adhered to active discretionary policy was pursued to defend the gold standard but it came close to a regime of rules than the current system. the argument for rules in general development by Milton Friedman wasn't appraised; alternative rules including the constant money growth ratio, interest rate rules, nominal GDP targeting and price rules were analyzed. Until 1977, the general argument for monetary rules suffered from the apparent dominance of discretion. If a particular monetary policy was desirable then it could always be adopted by discretion. The introduction of the notion of dynamic inconsistency made a stronger case for rules.