Are Rules Better Than Discretion?
The focus here is primarily on the early part of the transmission mechanism — that is, on the path between the actions of the Bank of Canada and financial market outcomes, since this is less researched and less widely understood than the links between financial market outcomes and spending and inflation.
Given the relatively low inflation rate that has persisted over the past four and a half years, some economists and policymakers maintain that the Federal Reserve has finally achieved its long-sought-after goal of full credibility.
Over the next couple of years there will be further important changes in the way monetary policy is implemented as a result of the expected introduction in the first half of of the Large Value Transfer System a system for transferring large value payments currently under construction by the Canadian Payments Association.
The first is a stated commitment to achieving a given policy goal. Louis Thus, a credible monetary policy tends also to yield low and stable nominal interest rates. Kliesen Recent economic research suggests that monetary policy will be more effective if it is both transparent and credible.
Freedman's second article analyses the way in which strategic and tactical elements enter into the Bank's decisions regarding the MCI path.
Several types of these rules have been advocated. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted.
Figure 1 Consumer Price Index Inflation Rates SOURCE: Bureau of Labor Statistics Many economists have since argued that the best way to prevent a repeat of the substandard inflation performance of the late s to early s is through an arrangement that consistently strives to achieve the goal of long-run price stability.
By targeting nominal GDP, the Fed can, therefore, implicitly target the prevailing inflation rate.