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Rethinking ExpectationsThe Way Forward for Macroeconomics$
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Roman Frydman and Edmund S. Phelps

Print publication date: 2013

Print ISBN-13: 9780691155234

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691155234.001.0001

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Swings and the Rules-Discretion Balance

Swings and the Rules-Discretion Balance

(p.373) Chapter Twelve Swings and the Rules-Discretion Balance
Rethinking Expectations

John B. Taylor

Princeton University Press

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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