When engaging in discretionary monetary policy, central banks face myriad incentives that might clash with the goals of improving economic well-being or stabilizing economic activity. Even if those incentives are appropriately aligned, difficult problems linger. Central bankers can influence the money supply using sundry tools, but they don’t always know the consequences of their actions. Such skepticism doesn’t mean discretionary monetary policy should be jettisoned for free capital flows or fixed exchange rates, only that caution is in order. Economists, central bankers, and other policy makers rarely have sufficient knowledge about the effects of monetary policy to confidently advocate for tighter or looser monetary ...
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