Rules rather than Discretion or Automaticity: Monetary System Performance in Times of Economic Distress
31 Pages Posted: 26 Mar 2018 Last revised: 1 Apr 2018
Date Written: March 27, 2018
This paper compares monetary system performance in terms of price level stability for the ideal types constrained discretion, rules and automaticity. A proprietary model for annual US gold output dependent on macro-economic factors is developed, to model automaticity under a gold standard with 100% reserve requirement. Within a United States model economy, back-tests for eight episodes of economic distress show that constrained discretion performs worst both in terms of time inconsistency and inflationary bias, while the rule-based Friedman proposals outperform. This challenges current consensus favoring discretionary central bank intervention.
Keywords: Monetary Policy, Price Level Stability, Rules vs. Discretion, Constrained Discretion, Friedman Rule, Gold Standard, Inflationary Bias, Time Inconsistency
JEL Classification: C54, E52, E58, E65, E66
Suggested Citation: Suggested Citation