Monetary rules without romance




Cutsinger, Bryan P.

Journal Title

Journal ISSN

Volume Title



How much independence should the monetary authority retain in a rules-based regime? The conventional wisdom holds that while the political system - particularly in a democratic society - should determine the overarching goal of monetary policy, the central bank should remain free to select whichever "levers" it deems most appropriate for achieving the goal. This paper evaluates whether instrument independence is consistent with the goals of a rules-based regime by examining the monetary and macroeconomic effects of allowing the monetary authority discretion over the choice of control procedures when its objectives are at odds with the public interest. I argue that while a benevolent monetary authority would always select the most "efficient" policy instrument, i.e., the instrument consistent with achieving its stated objective, an opportunistic one may intentionally choose instruments that obscure its objectives, thereby undermining the purpose of monetary rules.



central bank independence, monetary rules, policy instruments, political economy, Research Subject Categories::SOCIAL SCIENCES, demand for money, money supply, policy objectives