Economic Disturbances and Equilibrium in an Integrated Global Economy

Chapter 27

Transparency and Rule-Based Monetary Policy

Abstract

In spite of the dual mandate, the Fed has stated its opposition to a rule-based monetary policy on numerous occasions. It clearly favors discretion over a strict rule. Their argument is that they can adjust and consider changing economic conditions and react before the actual economic data is reported in the press. The advantage of this approach is that the Fed may be able to react much more quickly. The downside is that they may make a forecasting mistake. The success of the discretionary approach will depend greatly on the ability of the central bank to anticipate shifts in the economy. We have our reservations. These are the same people who missed the onset of the financial crisis. ...