Description

There is a long-running debate among economists as to whether macroeconomic policy decisions should follow pre-defined rules or be left to the discretion of benevolent and informed policymakers. This article explains the reasons and risks behind the growing popularity of the former, focusing on monetary and fiscal policy. The article then proposes a framework to decompose policy rules so as to understand the diversity of options in rule design. With the support of this framework, we compare the performance of monetary and fiscal policy rules, suggesting that the apparent weaknesses of the latter may be explained by specific design choices and the supporting institutional framework. These weaknesses can be addressed in designing and strengthening such rules over time.