NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Making Discretion in Monetary Policy More Rule-Like

Frederic S. Mishkin

NBER Working Paper No. 24135
Issued in December 2017
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which have serious shortcomings. Rather it can choose a constrained discretionary regime that has rule-like attributes. Monetary policy discretion can be made more rule-like, by 1) adopting a nominal anchor such as an inflation target, and 2) communication of a monetary policy reaction process, especially through data-based forward guidance, in which the monetary policy authorities describe how the future policy path will change as economic circumstances change.

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Document Object Identifier (DOI): 10.3386/w24135

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