NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rules versus Discretion

Robert J. Barro

NBER Working Paper No. 1473 (Also Reprint No. r0799)
Issued in September 1984
NBER Program(s):   EFG

Under a discretionary regime the monetary authority makes no commitments about future money and prices. Then, if surprise inflation conveys economic benefits and if people form expectations rationally, it turns out that the equilibrium involves high and variable monetary growth and inflation. Moreover, since the high rate of inflation is anticipated there are no benefits from inflation surprises. The implementation of an enforced rule can lower the mean rate of inflation while delivering the same average amount of inflation surprises, namely zero. Using these results as a background, the paper discusses alternative monetary rules, including quantity versus price rules and a prescription for stablilizing nominal GNP. This discussion touches on the distinction between positive and normative economics, which leads to a pessimistic appraisal of the role for economists' policy advice.

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Document Object Identifier (DOI): 10.3386/w1473

Published: Barro, Robert J. "Recent Developments in the Theory of Rules versus Discretion." Economic Journal, Supplement, (1985), pp. 23-37.

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