Economics Discussion Chapter 18 &19: Discussion of pros and cons for central bank policies and Determine the impact of the US used inflation targeting

Economics
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  • Discuss the pros and cons of central banks setting policy based on rules as opposed to setting policy based upon the discretion of policymakers at each policy meeting.
  • Determine the impact on the economy if the central bank in the U.S. used inflation targeting. Explain your rationale.
Dec 13th, 2015

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In monetary Policy, discretion is important in offsetting output fluctuations whereas monetarists suggest a tight, fixed rule to ensure price stability. 

The effects of central bank using inflation targeting are as follows;

  • Restricted ability of the central bank to respond to financial crises or unforeseen events;
  • Potentially poor outcomes in employment, exchange rate and other macroeconomic variables beside inflation

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Dec 13th, 2015

In monetary Policy, discretion is important in offsetting output fluctuations whereas monetarists suggest a tight, fixed rule to ensure price stability. Having policy tools that are based on rules give little room for policy errors. However, this requires high degree of confidence.

Having a discretion that is stable and flexible comes at a cost. There is need for limited predictability of decisions and being able to own the decisions irrespective of public opinion.


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