Retrospectives: On the Evolution of the Rules versus Discretion Debate in Monetary Policy

Abstract

Episodes of macroeconomic upheaval associated with monetary policy failure have provided the stage for important debates on rules versus discretion. We discuss the main features, results, commonalities, and differences in the debates that emerged after three such episodes. The modern debate was born during the Great Inflation of the 1970s and focused on both rules versus discretion and the properties of alternative rules. The middle debate originated with Henry Simons and the Chicago School during the Great Depression in the 1930s and focuses on policy uncertainty. The earliest systematic debate involved the Currency and Banking Schools in Britain in the 1820s, but, in spite the views of many of its participants and doctrinal historians, it seems to have primarily been about the degree of activism under a single rule—that of the gold standard.