Debate over fixed rules and camera choices

Answer 1

There has been a long-standing debate about whether monetary policy should be carried out according to fixed rules or discretion.

" Discretionary choice " was a Keynesian policy proposition. It referred to the balancing measures taken by the central bank to achieve the established monetary policy goals based on the judgment of the economic situation. During the economic boom, the money supply was reduced to prevent economic growth from overheating, and during the economic depression, the money supply was increased to increase effective demand and promote economic growth. In the 1950s and 1960s, when Keynesianism dominated the Western economics world, the monetary authorities of Western countries mostly adopted the "discretion" monetary policy. However, there were also some problems with the " discretion ", such as the lack of expected management, the difficulty of grasping the time lag of the policy, and the subjective and arbitrary implementation of the policy may challenge the monetary discipline, which was not conducive to the stability of the currency and the maintenance of the credibility of the monetary authorities. It may also be because it has a great deal of discretion, which causes interference to the macro economic environment. Moreover, due to the changes in the economic situation before and after the implementation of the policy and the revision of the policy by the government due to the expectations of the residents, there is a time discrepancy between the economic policy and the actual economic operation. In the 1960s, the Western countries experienced a stagflation situation in which employment and inflation co-existed. The policy of " discretion " could not solve this problem, so it was criticized by other schools of thought.

Fixed rules meant that regulation did not respond to economic changes, but was implemented according to pre-established policies with fixed rules, such as a policy that stipulated the rate of monetary growth. The representative figure of the modern monetary school, Freedman, proposed the single currency rule. He believed that the monetary authorities should announce a stable growth rate of the money supply to avoid causing artificial disturbances to price expansion and contraction. Since the 1970s, the Federal Reserve had basically accepted the monetarist "single currency rule" and determined the money supply as a means of regulating the macro economy. Since the 1990s, Western scholars have proposed other monetary policy rules, such as the Taylor rule. Although fixed rules were conducive to enhancing the credibility of monetary policy, there was a problem that the rules were not suitable for realistic constraints. Because the market was often unpredictable and full of uncertainty, it was difficult for the monetary authorities to accurately predict the future economic and financial operations and their changes. If the implementation of monetary policy adhered to the rules, the central bank would lose the ability to deal with economic crises and regulate the economy, but if it did not follow the rules, the central bank would lose the public's trust.

Theoretically speaking, Keynes 'theory on monetary policy operation had obvious characteristics of discretion, while the monetarism represented by Freedman supported fixed rules. In practice, despite the repeated challenges, most countries still focused on monetary policy based on discretion. This was mainly because monetary policy often focused on the short and medium-term, and discretion could better meet various constraints in economic operations, especially in the case of high information costs and great uncertainty. It could leave more room for timely adjustment and even "trial and error" for policies.
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