"Rules vs. Discretion" after Twenty-Five Years
Two models of government policy are presented. In the first the choice of an instrument for conducting monetary policy is analyzed. The ease of observing policy under an exchange-rate regime is shown to confer an advantage on it compared with a regime that targets the money growth rate. In the second a discretionary fiscal regime is compared with one that mandates a simple policy rule restricting capital taxation. The discretionary regime is preferred under a Ramsey government, but the rule confers an advantage if the type of government is uncertain and the probability of a myopic administration is high enough.