Rules versus Discretion at the Federal Reserve: On to the Second Century

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Rules versus Discretion at the Federal Reserve: On to the Second Century

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Title: Rules versus Discretion at the Federal Reserve: On to the Second Century
Author: Friedman, Benjamin Morton
Citation: Friedman, Benjamin Morton. 2012. Rules versus discretion at the Federal Reserve System: On to the second century. Journal of Macroeconomics 34(3): 608-615.
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Abstract: Much of the experience of the U.S. Federal Reserve System, during the institution’s first hundred years, has revolved around controversies that fit squarely within the classical debate over rules versus discretion in economic policymaking. This paper looks back at the major episodes in this history since World War II, including the initial freeing of monetary policy from war-related interest-pegging, the Federal Reserve’s delayed but ultimately successful response to the inflation of the 1970s and early 1980s, the brief experiment with monetary aggregate targets, the extraordinary actions prompted by the 2007-9 financial crisis, and the current tentative exploration of inflation targeting. The paper concludes that the tension between the desire for rule-based policymaking and the practicalities that lead central bankers to preserve discretion in actual policy decisions does not admit of any easy, straightforward solution, and therefore that this tension is likely to persist into the Federal Reserve’s next century too.
Published Version: dx.doi.org/10.1016/j.jmacro.2012.05.009
Other Sources: http://ideas.repec.org/a/eee/jmacro/v34y2012i3p608-615.html
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:10886842
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