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The Rules-Discretion Cycle in Monetary and Fiscal Policy

Author

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  • John B. Taylor

    (Stanford University)

Abstract

This lecture starts with a review of historical trends in the balance between rules and discretion: first toward more discretionary policies in the 1960s and 1970s; second toward more rules-based policies in the 1980s and 1990s; and third back again toward discretion in recent years. In each of these swings, monetary policy and fiscal policy moved in the same direction. These swings are correlated with economic performance—unemployment, inflation, economic and financial stability, the frequency and depths of recessions, the length and strength of recoveries. The lecture then provides evidence that the correlation is causal with the moves toward more rules-based policies improving economic performance.

Suggested Citation

  • John B. Taylor, 2011. "The Rules-Discretion Cycle in Monetary and Fiscal Policy," Finnish Economic Papers, Finnish Economic Association, vol. 24(2), pages 78-86, Autumn.
    • Handle: RePEc:fep:journl:v:24:y:2011:i:2:p:78-86
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    References listed on IDEAS

    as
    1. Eichenbaum, Martin, 1997. "Some Thoughts on Practical Stabilization Policy," American Economic Review, American Economic Association, vol. 87(2), pages 236-239, May.
    2. John P. Judd & Bharat Trehan, 1995. "Has the Fed gotten tougher on inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar31.
    3. Blinder, Alan S, 1981. "Temporary Income Taxes and Consumer Spending," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 26-53, February.
    4. Taylor, John B. & Williams, John C., 2010. "Simple and Robust Rules for Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 15, pages 829-859, Elsevier.
    5. Gramlich, Edward M, 1979. "Stimulating the Macro Economy through State and Local Governments," American Economic Review, American Economic Association, vol. 69(2), pages 180-185, May.
    6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Athanasios O. Tagkalakis, 2013. "The output effects of systematic and non-systematic fiscal policy changes in Greece," Economics Bulletin, AccessEcon, vol. 33(3), pages 1816-1831.
    2. Walsh, Carl E, 2015. "Goals and Rules in Central Bank Design," Santa Cruz Department of Economics, Working Paper Series qt3md9p6t5, Department of Economics, UC Santa Cruz.

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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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