Compare and contrast
the use of policy rules
versus discretionary
policy.
Discretionary policies refer to measures taken in response to economic changes, but do not follow a strict set of rules; instead, subjective judgments are used to treat each situation uniquely. There is consensus for a discretionary strategy since it helps politicians to adapt effectively to incidents. Discretionary policy, however, may be subject to dynamic inconsistency, a government may say that it intends to indefinitely raise interest rates to bring inflation under control, but then later relax its position. This could render the policy unbelievable and eventually ineffective.
A rule-based policy would be more credible, because, unlike discretionary policies, it is more straightforward and easier to predict. The policy is applied based on economic predictor incidents, and the policy is expected and conducted on time.
Comparison between discretionary and rule-based policy are-
A balance between rigid discretionary and rule-based laws is to include an autonomous agency with discretionary control. For example, without government intervention, the central bank of the country fixes interest rates but does not follow a rigid policy stance based on laws. In this situation, the central banking authorities have control and are in a position to use monetary policy to allow economic development and full employment to be mandated by them. Government monetary policy should not destabilize the measures that they implement.
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