SMP: The Rule of Law vs the Rule of Experts

Comentario en Sound Money Project sobre cómo llevar adelante política monetaria.

Our worldviews shape the ways in which we approach problems, challenges, and questions. Our “worldviews,” as I refer to them in this post, are so deeply embedded in our minds that we don’t usually realize our thoughts are driven by them. Monetary policy is not free from this “worldview” effect.

There is a big debate in monetary policy on whether central banks should follow a monetary rule or have the ability to decide how to perform monetary policy at the policymaker’s discretion. In a world of second bests, the question underlying this debate is how errors would be minimized: by following the right rule (in itself another issue) or by giving central bankers discretionary powers. In many cases, what one side sees as an argument on their side, the opposite side sees as an argument in favor of theirs. For instance, the lack of precise knowledge about the economic situation can be an argument for a rule-based monetary policy or for a discretionary approach. Proponents of a rule-based monetary policy would argue that because our knowledge is limited, we should follow a rule that will, say in average, minimize the errors. However, one could also argue that because our knowledge is limited, a rule will be biased and therefore discretionary policy (if an expert is in charge) is a better option than an imperfect rule.

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