Constrained Discretion

Bernanke’s Quest foran Inflation Target

One of the hot topics in monetary economics is whether policy makers should be constrained by rules or use discretion.1 Advocates of discretion argue that the Fed should react to developments in the economy using its best judgment at the time. They believe that in a complicated and ever-changing world, rules prevent the Fed from correctly balancing risks to growth, inflation, and financial markets. By contrast, rules advocates argue that policy makers are not very adept at managing the economy, that they can be influenced by politicians, and that they may be tempted to pursue policies ...

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