Recent Development in the Theory of Rules versus Discretion - Essay Example

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Recent Development in the Theory of Rules versus Discretion

Monetary policies play a crucial role in achieving certain outcomes - low unemployment, high money supply, or low inflation - in the economy. Achieving these outcomes, however, depends on the existing conditions surrounding the economic environment, which is also affected both by an individual's expectations on future policies and economic conditions and the manner that these expectations are formed (Barro 1984: 1-2). The weight given to individual expectations, in this regard, highlights the monetary rules versus discretion debate under monetary economics such that as illustrated by the Barro-Gordon Model, an individuals' expectations regarding future policies can either offset the effects of inflation under discretionary policies or achieve the zero inflation outcome through rules (Barro and Gordon 1983).
Contrary to the traditional debate between rules and discretion focused on a policymaker's capabilities and objectives; the Barro-Gordon Model is based on Kydland and Prescott's work that identifies rules as a form of commitment similar to public policies and business dealings (Barro 1984: 1). ...
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Summary

In his essay "Rules Versus Discretion", Robert J. Barro (1986) makes the case for alternative monetary rules amidst the debate between discretionary and rules-based monetary policies. As posited by Barro, the question between discretionary or rules-based policies is not material to achieving optimal outcomes within the economy…
Author : cathrine56

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