Should monetary policy be made by rule rather than by Essay

Should monetary policy be made by rule rather than by discreation(macroeconomic) - Essay Example Both the rules and discretion need to be analysed in terms of the stability in economy and the inflation targets. While rules determine the inflation sequence, discretion determines the full employment that is lacks in rules. Rules, however maintains the inflation in a statistical fashion, and helps in operating the economy in a definite and expected way. Economists supporting rules argue that the Central Bank will work independently without the political influences, where as those who raise hands for discretion argues that the increasing rate of interest and unemployment will be monitored can controlled by discretion. As a result, the Federal will meet a circumstance to work freely within the given allocations. The central banks consider rules as inflexible but at the same time rules will eliminate the mistakes, by demanding the Central Bank to work within the policy requirements. Where as the discretion based policy will enable the Federal Reserve Bank to act will full freedom within the given limit. In the case of rule, based monetary policies the rate of unemployment and the inflation remains linked in a statistical proportion and the rules will lead to high inflation rates that in turn will result in increase in unemployment. Though some supporters favour employment productivity, their main target seems to be fixed towards increasing production and distribution to continue with a economic growth rather than improving the labour market. Milton Friedman supports a rules based policy, because he stresses on the point that rules will have a constant growth of money. Friedman [1968] argues that a discretion based monetary policy will put efforts to bring out less inflation rates and full em ployment, but this will consequently result in increase in inflation rates and unemployment as well. The rules advocated by Friedman [1968, 1972, 1992] was aimed at balancing the stability in accordance with the production level. The