Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 15: Problem 13

Argue the case for and against a monetary rule.

Short Answer

Expert verified
Monetary rules offer predictability, transparency, independence from political pressure and can help avoid time-consistency problems, yet they might lack the flexibility needed to respond to unexpected economic developments, can be rigid in crisis situations, and can be challenging to implement due to dynamic economic conditions.

Step by step solution

01

Understanding Monetary Rule

A monetary rule implies that the Central Bank is committed to follow a predictable and rule-based policy rather than making decisions at its discretion. Such rules often specify fixed guidelines for the growth rates of money supply.
02

Argument For Monetary Rule

Monetary rule offers various advantages:\begin{itemize}\item Predictability: Fixed rules give better predictability for investors, which can lead to economic stability.\item Transparency: If the actions of the central bank are based on set rules, the operations become more transparent, strengthening trust and credibility.\item Independence: Rules give the Central Bank independence from political pressures. \item Avoidance of Time-Consistency Problem: Following a rule helps avoid the problem of time-inconsistency, where policies that seem beneficial in the short term end up being detrimental in the long run.\end{itemize}
03

Argument Against Monetary Rule

Despite its benefits, a monetary rule has several shortcomings:\begin{itemize}\item Lack of Flexibility: Fixed rules may prevent the central bank from implementing needed policy adjustments in reaction to unpredictable economic events.\item Rigidity: The rigid nature of rules can limit the central bank's power in crisis situations.\item Difficulty in Implementation: Adjusting the monetary base with precision according to a predefined rule can be challenging due to changing economic conditions.\end{itemize}

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Explain how the monetarist transmission mechanism works.

Consider the following: Two researchers, \(\mathrm{A}\) and \(\mathrm{B}\), are trying to determine whether eating fatty foods leads to heart attacks. The researchers proceed differently. Researcher A builds a model in which fatty foods may first affect \(\mathrm{X}\) in one's body, and if \(\mathrm{X}\) is affected, then \(\mathrm{Y}\) may be affected, and if \(\mathrm{Y}\) is affected, then \(\mathrm{Z}\) may be affected. Finally, if \(Z\) is affected, the heart is affected, and the individual has an increased probability of suffering a heart attack. Researcher B doesn't proceed in this step-by-step fashion. She conducts an experiment to see whether people who eat many fatty foods have more, fewer, or the same number of heart attacks as people who eat few fatty foods. Which researcher's methods have more in common with the research methodology implicit in the Keynesian transmission mechanism? Which researcher's methods have more in common with the research methodology implicit in the monetarist transmission mechanism? Explain your answer.

Suppose the combination of more accurate data and better forecasting techniques would make it easy for the Fed to predict a recession 10 to 16 months in advance. Would this state of affairs strengthen the case for activism or nonactivism? Explain your answer.

Suppose it were proved that liquidity traps do not occur and that investment is not interest insensitive. Would this be enough to disprove the claim that expansionary monetary policy is not always effective at changing Real GDP? Why or why not?

Monetary policy can affect relative prices. Do you agree or disagree with this statement? Explain your answer.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free