A rule based monetary policy envisions that monetary authority should increase money supply according to some fixed rule which … at a level that makes the forecast of the policy target equal to the target. A key question is whether monetary policy would better achieve this goal via strict policy rules or a discretionary framework. A discretionary policy is supported because it allows policymakers to respond quickly to events. These typically used fiscal and monetary policy to adjust inflation, output, and unemployment. rules, policy rule definition and spending enough to stabilize total picture of inflation rather than the diversity. America needed to decide macroeconomic policy in not by the real wealth generators is inflation. Discretionary monetary policy is essentially throwing darts at a moving target while blindfolded. According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the: Reaction of the public to the expected effects of policy changes The rule suggested by the monetarists is that the money supply should be increased at the same rate as the potential growth in: An increase in the quantity of money leads to. Discretionary Policy. Discretionary central banking is also plagued by the incentive problem . macroeconomic policy rules, like the well-known Taylor rule for monetary policy.5 In the spirit of the 4 This systematic part of macroeconomic policies that is based on policy rules is also often referred to as the anticipated part of macroeconomic policies, whereas the discretionary, non-systematic part of macroeconomic policies -the policy Organizations such an expansionary monetary policy making investment is a result would adjust to discretionary. Monetary policy refers to the Federal Reserve's work with the money supply to influence the economy. Salter provides a framework to help policymakers better understand how incentives and information can affect monetary policy and discusses discretion-based and rule-based approaches to monetary policy. Discretionary monetary policy is a more flexible approach whereby central bankers at the Fed can quickly react to changing factors to tweak the economy, especially in an unusual situation. Fixed-Rule Policy: A fiscal or monetary policy designed to be an economic goal or target of a government. However, following the stagflation of the 1970s, policymakers were attracted to policy rules. The rates are-similar because banks can readily substitute between them. He concludes that a rule-based approach is superior and may have been able to prevent the 2008–2009 financial … The debate over “rules vs. discretion” was a centerpiece of disputes over monetary policy during the 1960s-1980s. 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