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John Taylor Defends a Rules-Based Monetary Policy

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Published August 5, 2021

When it comes to economic policy, many policy makers find it beneficial to be inconsistent. Discretionary policy makes it easy for policy makers to do whatever they want, whenever they want. Instead, they should follow a rules-based policy, leading to greater accountability, predictability, and consistency over time.

Additional Resources:

  • Watch “Monetary Policy: Rules vs. Discretion,” with John Taylor, on PolicyEd. Available here.
  • Watch “Understanding Monetary Policy,” with John Taylor, on PolicyEd. Available here.
  • Watch the series Econ 1, with John Taylor on PolicyEd. Available here.
View Transcript

“It’s a pervasive issue of policy of all kinds. Basic principles of policy try to distinguish between rules that describe how monetary policy or other kinds of policies behave, versus discretion, where it’s basically [that] the policy makers can do whatever they want, at any point in time. A rule is just a description of how the instrument of policy changes when things in the economy change. There’s lots of advantages for rules: Predictability. You know that if there’s a deep recession, interest rates will go down. Accountability. If there’s a rule that says when the economy booms, interest rates rise, they can say we’re being accountable. In the case of monetary policy, a rule or a strategy that’s more consistent over time helps.”