Rules versus Discretion in Monetary Policy

Abstract

The debate about whether monetary policy decisions should be governed by rules or discretion has a long history, extending back at least as far as Henry Simons (1936). This debate has continued in the post-war period and still continues today. I will argue in this paper that the elements of a consensus are now beginning to emerge. Neither pure discretion, nor fixed adherence to an intermediate monetary target have proved satisfactory. In their place, several countries are moving toward a regime in which there is a clear target for the ultimate objective of monetary policy, together with a statement of the authorities’ decision making practices that is as open and transparent as possible.