Swings and the Rules-Discretion Balance
Swings and the Rules-Discretion Balance
This chapter examines two major swings in the balance between rules and the discretion of policymakers in U.S. economic policymaking in the past four decades: one in favor of rules and the other in favor of discretion. Evidence of the swing away from discretion is seen in actual fiscal policy and in the wide consensus among economists against the use of discretionary countercyclical fiscal policy in the 1980s and 1990s. The swing back toward discretion is found in the recent large discretionary fiscal stimulus packages and in deviations of monetary policy from the simple rules that described policy well in the 1980s and 1990s. Before elucidating the causes and effects of these swings, the chapter considers the economic and political rationale for policy rules. It suggests that the swing toward rules improved macroeconomic performance while the swing back toward discretion worsened it.
Keywords: discretion, policymakers, economic policymaking, fiscal policy, monetary policy, policy rules, macroeconomic performance
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