Revisited: Rules Versus Discretion in Monetary Policy

Open Access
Author:
Cassis, Kaitlyn Nicole
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Russell Paul Chuderewicz, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
  • James R. Tybout, Faculty Reader
Keywords:
  • rules
  • discretion
  • monetary policy
  • Fed
  • Chairmen
  • Federal Reserve
Abstract:
The debate over whether to use rules or discretion in setting monetary policy has been longstanding in economics literature and in practice. This paper reviews the arguments on each side and compares these viewpoints in relation to the Federal Reserve. Using the federal funds rate, policy rules and their modifications are evaluated in order to determine if central bankers have seemingly followed a policy rule through time. Although each period of central banker from the 1970’s onward has shown to align more closely with a different form of rule, no one rule has been able to effectively capture the behavior of all Fed Chairmen.