Macroeconomic Policy: Rules versus Discretion

The article discusses the fundamental principles of macroeconomic policy. It traces the development of macroeconomic policy ideas, and, particularly, the transition cycle from adhering to strictly defined rules to free discretion and vice versa – back to restricting the freedom of implementation of macroeconomic policy instruments. The article analyses the advantages and disadvantages of discretion as compared to the management that follows strictly defined rules. The special focus is on Bulgarian practice and tradition. The article proves that throughout history Bulgaria’s governing elite has failed to take advantage of discretionary management and it has been rather the norm for the government to abuse (deliberately or not) the right to a greater management freedom. On the contrary, when macroeconomic management has had to adhere to specific imperative restrictions, positive results have prevailed. Bulgarian practice has confirmed the theoretical statement that the losses resulting from poor discretionary national macroeconomic policy are much greater than the benefits resulting from a well-defined policy, carried out consistently. The nature of and changes in monetary policy during the 1990s and the introduction of the currency board arrangement are a telling contemporary example of this statement. The recent policies of the governing elite have been focussed on fiscal policy, bringing about continuing attempts for large-scale economic experiments, in spite of the lack of clear estimation of the possible consequences. The article’s analysis outlines some suggestions and recommendations, which are based on the adherence to clearly defined rules in fiscal policies and focuses the efforts of the state on establishing and developing adequate market institutions.