Getting Rules into Policymakers' Hands: A Review of Rules-based Macro Policy - Getting Rules into Policymakers' Hands: A Review of Rules-based Macro Policy - Central Bank of Chile
The Series of Economic Policy Papers of the Central Bank of Chile presents views and analyses of the Chilean economy and the conduct of monetary policy prepared by Bank authorities. This series, aimed at the general public, disseminates and discusses topics that are relevant to the goals and operations of the Central Bank.
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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.