Economists are divided over whether rules or discretion is the best policy for managing the economy. But however it may appear, it generally boils down to adjusting the supply of money in the economy to achieve some combination of inflation and output stabilization.. Some macroeconomists thus have argued in recent years that monetary policy should be ‘rule-based’ rather than discretionary, that is, Central Bankers strictly would have to follow some kind of monetary policy rule without the authority to deviate from it. A rule involves the exercise of control over the monetary authority in a way that restricts the monetary authority’s actions. Typically, the idea behind this type of policy is to deliberately impact that trend, gradually moving the economy in a direction that is esteemed by government leadership as more beneficial to the jurisdiction. a. Discretionary Fiscal & Monetary Policy: Summing Up. Recognizing the potential drawbacks of purely discretionary policy, the Federal Reserve frequently has sought to exploit past patterns and regularities to operate in a systematic way. Explain how replacing a seasoned monetarist with a non-monetarist in the management of monetary policy affects “reputation” and “delegation” as tools of fighting inflation. Term discretionary policy Definition: Government policies that involve explicit actions designed to achieve specific goals.A common type of discretionary policy is that designed to stabilize business cycles, reduce unemployment, and lower inflation, through government spending and taxes (fiscal policy) or the money supply (monetary policy). Discretionary monetary policy can give rise to an inefficiently high rate of inflation. Rules can directly limit the actions taken by a monetary authority. The debate over “rules vs. discretion” was a centerpiece of disputes over monetary policy during the 1960s-1980s. In monetary policy, discretionary policymaking corresponds to the central bank seeking to influence or respond to momentary fluctuations in unemployment and inflation without a long-term strategy. Currently, the Federal Reserve employs discretionary monetary policy without any rigid operational framework. Monetary policy has lived under many guises. would have a discretionary monetary policy. Supporters of rules argue that discretionary monetary policy falls prey to information and incentive problems. The idea of ‘rule-based’ monetary policy is actually relatively old. Expansionary fiscal and monetary policy can help to end recessions and contractionary fiscal policy can help to reduce inflation. One of the most important contributions to this debate was by … The decision to cut rates in 2019 was controversial. Most economists would agree that in the long run, output—usually measured by gross domestic product (GDP)—is fixed, so any changes in the money supply only cause prices to … Discretionary policy may be inconsistent when it does not change the initial conditions that create a disturbance, or shortsighted when a policy requires lags to materialize. Supporters of discretion argue that strict rules-based policy cannot account for real-world complexities, such as financial innovation, that can make a previously sound rule unsound. Monetary policy is still considered expansionary, which is unusual at this stage of an expansion, and is being coupled with a stimulative fiscal policy (larger structural budget deficit). A discretionary fiscal policy is a monetary policy that is created and initiated by a government entity as a means of dealing with events and trends that are taking place in the economy. The monetary policy of the Federal Reserve has involved varying degrees of rule- and discretionary-based modes of operation over time. Tn the context of monetary policy, a rule is a restriction on the monetary authority’s discre-tion.

what is discretionary monetary policy

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