A Review of the Rules versus Discretion Debate in Monetary Policy

Monetary economists seek improvements in monetary policy in order to enhance macroeconomic growth and stability. Public policy discussions are often framed within a rules versus discretion context. Should policymakers be mandated to follow explicit rules in forming policy or should they have complete discretion? Many economists favor rules to limit or end discretion, and have developed a body of theory to support the implementation of a rules-based monetary policy. Others counter this theory with their own arguments and empirical work. This paper reviews the arguments for and against rules in monetary policy.