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Macroeconomic Policy Rules Versus Discretion: Some Analytical Issues

Published online by Cambridge University Press:  28 November 2008

S. T. Sayer
S. T. Sayer
Affiliation:
Department of Economics, University of Edinburgh
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Abstract

In the extensive literature on the rules versus discretion debate three related, but logically distinct, areas of debate are frequently confused: the active versus passive policy debate, the rules versus discretion debate proper, and the open-loop (i.e. fixed) rule versus closed-loop (i.e. contingent) rule debate. Section 2 of this paper examines the nature of and interrelations between these three areas of debate. In section 3 the contributions of economic analysis to the debate are explored in an apolitical framework, in particular, the arguments for rules proposed by Friedman and Kydland and Prescott are assessed. Section 4 extends this framework to take into account the political dimension and the rules versus discretion debate is viewed as a cost-benefit problem involving both political and economic factors. A general conclusion is that since the rules versus discretion debate is an exercise in political economy, the debate cannot be properly assessed in the sterile apolitical framework of pure economic analysis.

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Type
Articles
Information
Journal of Public Policy , Volume 1 , Issue 4 , October 1981, pp. 465 - 479
Copyright
Copyright © Cambridge University Press 1981

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