Dear Anna and all,

The literature on "rule vs discretion" changed a lot since Simons' 1936 seminal contribution (and at the beginning of the story) untitled "Rules vs Authorities". More recently the debate got interesting steps or contributions with two similar concepts with Bernanke and Mishkin (1997) on "constrained discretion" (1997: 104) and also a "rule-like-behaviour" (1997: 104) allowing more discretionary power within a monetary policy rule approach. Warin (2006) synthetized the evolution of this "rule vs discretion" with the "credibility vs flexibility " concept. In fact, the possibility that monetary authorities will not respect their own objectives or commitments reduces confidence in the central bank. The latter should, then, develop its credibility towards private agents’ expectations as those market participants’ expectations are critical to the success of monetary policy. According to Warin (2006), ‘the degree of confidence in the central bank is relevant for economic agents when they form their expectations about future inflation’ (Ibid: 9). However, even though central banks should commit themselves to rules, they should also maintain their operational autonomy – or central bank’s flexibility – in case of exogenous and unexpected shocks.
 
Monetary policy rule "à la Kydland/Prescott" (1977) is a turning point in the monetary policymaking strategy. Kydland and Prescott showed that macroeconomic policies could be both optimal on the static point of view and dynamically inconsistent. From that, discretionary monetary policies will not always be seen to be credible, and deserve to be rejected. Kydland and Prescott’s conclusion is quite clear:
"Active stabilization may very well be dangerous and it is best that it is not attempted. Reliance on policies such as a constant growth in the money supply and constant tax rates constitute a safer course of action. [. . .] Policymakers
should follow rules rather than have discretion. The reason that they should not have discretion is not that they are stupid or evil but, rather, that discretion implies selecting the decision which is best, given the current situation. Such behavior either results in consistent but sub-optimal planning or in economic instability" (Kydland and Prescott 1977: 49)


To me, Bernanke and Mishkin (1997) added a new stage in the ‘rule vs discretion’ debate by advocating a complementarity, instead of an opposition between the two central bank’s behaviours. This complementarity is embodied within the expression ‘rule-like-behaviour’ in the sense of constrained discretion. They addressed this methodological debate in an inflation targeting framework which they saw as a "hybrid" monetary policy approach. The concept of rule-like-behaviour should be understood as follows:
"Some useful policy strategies are ‘rule-like’, in that by their forward-looking nature they constrain central banks from systematically engaging in policies with undesirable long-run consequences; but which also allow some discretion
for dealing with unforeseen or unusual circumstances. These hybrid or intermediate approaches may be said to subject the central bank to ‘constrained discretion’ (Bernanke and Mishkin 1997: 104).

References:

Bernanke, B. and F. Mishkin (1997). Inflation targeting: A new framework for monetary
policy? Journal of Economic Perspectives 11(2), 97–116.

Simons, H.-C. (1936). Rules versus authorities in monetary policy. Journal of Political
Economy 44, 1–30.

Warin, T. (2006). A Note on ‘Post-Modern’ Monetary Policy. Middlebury College
Economics-Discussion Paper No-06-17.

Best,

Nicolas BARBAROUX
Associate Professor in Economics
University of St Etienne- FRANCE

Le Mercredi 13 Février 2013 17:18 CET, Anna de Bruyckere <[log in to unmask]> a écrit: 
 
> Dear all,
> 
> I am trying to get a better historical and philosophical understanding of
> the rules vs discretion debate for economic policy, with the problem of
> time inconsistency as a central focus/argument for rule following rather
> than discretionary policy.
> 
> I am currently looking for seminal contributions to that literature
> (Kydland & Prescott's 1977 'Rules rather than Discretion' being an obvious
> part of it), as well as for any historical or philosophical perspectives on
> it. With respect to the latter, it may be that I have not been searching
> very well, but I have mostly found just one piece, Argy's 1988 'A Post-War
> History of the Rules vs Discretion Debate' (which I read as a contribution
> to "Milton Friedman: Critical Assessments", 1990, eds. Wood and Woods).
> 
> I'd be much obliged in case some of you would have suggestions on how to
> proceed. I will make sure to compile a summary of suggestions and share
> that on the list with you all.
> 
>  With my best wishes,
> Anna
> 
> 
> Anna de Bruyckere
> Darwin College
> Cambridge CB3 9EU
> [log in to unmask]