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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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PRINTED FROM PRINCETON SCHOLARSHIP ONLINE (www.princeton.universitypressscholarship.com). (c) Copyright Princeton University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in PRSO for personal use.date: 24 September 2021

Principled Policymaking in an Uncertain World

Principled Policymaking in an Uncertain World

(p.389) Chapter Thirteen Principled Policymaking in an Uncertain World
Rethinking Expectations

Michael Woodford

Princeton University Press

This chapter examines the reasons for the focus on the analysis of monetary policy rules rather than on decisions about individual policy actions, as well as the extent to which such a focus continues to be appropriate in the light of subsequent events—changes in central banks' approach to monetary policy in the decades since the publication of the Phelps microfoundations volume, along with the reconsideration of macroeconomic theory and policy that is necessary in the wake of the global financial crisis. The chapter first explains why recognition of the importance of expectations led to an emphasis on policy rules in the theoretical literature before discussing possible types of policy commitments in the case of monetary policy. It then analyzes the theory of monetary policy after the global financial crisis and reframes the debate over policy rules versus discretionary policy by proposing an approach it calls “principled policymaking.”

Keywords:   monetary policy, central banks, macroeconomic theory, financial crisis, expectations, policy rules, policy commitments, discretionary policy, principled policymaking

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