A policy of discretion gives central bank the ability to react to news Essay

A policy of discretion gives central bank the ability to react to news about the economy. In this light discuss whether discretion is a better way to run monetary policy than following a rule - Essay Example The econometric discretion policy evaluate on fiscal and monetary policy by using the new rational expectation method of macroeconomics. This has been the substantial subject cause for increased recent year’s research. A number of factors have provided a motivation for the research. The critique of Lucas showed that traditional discretion econometric policy was flawed in its evaluation. This was supported by the fact that recognition of rational expectation is not an implication of monetary policy effectiveness as was being potted by the discretion policy. On the other hand, the finding that credibility has significant benefits which are empirical and the demonstration of time inconsistency is a blatant proof that policy rule are superior to discretion policy (Baumol & Blinder, 2011, p.41). Although it is possible to find precursors of the new policy rule research, the recent analyses have been made possible by estimation and solution techniques which are new in the wide economy equilibrium model. The empirical model development of consistent expectation of prices and wages dynamic is another key proof factor of policy rule applicability. Also, the multi-country empirical framework abilities to efficiently handle the international cash flows in the world market as a factor of occurrence has been a proof too for policy rule’s effectiveness than discretion. However, the policy rules preferred in this research description paper have generally not involved fixed settings for the monetary policy instruments. The instruments not involved are such as the phenomenon of constant growth rate for the supply of money. In this context, the rules have been proved to be responsive by calling for the changes in the supply of money, monetary base and the short term interest rates these callings are to provide a response to the changes in the levels of price