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Rules vs. Discretion: Decoding FOMC Policy Deliberations

Author

Listed:
  • Michael D. Bordo
  • Klodiana Istrefi
  • Humberto Martínez

Abstract

This study provides evidence on the usage and preferences of Federal Reserve’s Federal Open Market Committee (FOMC) regarding the balance between rules and discretion in policy decisions. Analyzing FOMC transcripts over 40 years, we find that while Discretion has been a consistent feature in the language of the FOMC, the use of the language of Rules surged notably in the mid-1990s, aligning with theoretical advancements in monetary policy. We identify that a rise in Discretion terminology occurs during economic downturns and periods of heightened uncertainty. In contrast, a rise in the language of Rules is supported by higher references to terms such as “credibility” and “commitment,” and is more prevalent among hawkish FOMC members. Our findings link the increased use of the language of Rules (Discretion) language to tighter (easier) monetary policy, revealing a significant role of this debate in shaping policy outcomes, in particular periods.

Suggested Citation

  • Michael D. Bordo & Klodiana Istrefi & Humberto Martínez, 2024. "Rules vs. Discretion: Decoding FOMC Policy Deliberations," NBER Working Papers 33262, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33262
    Note: ME
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    More about this item

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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