the Fed for not being specific about the timespan over which average inflation will be measured. A strategic approach is necessarily a rules-based approach, which is precisely how the international monetary system should be run. Key Points. But, unlike the vague definition that the Fed has now adopted, I explicitly defined the “average” as “the rate of inflation over the previous four quarters.” In other words, the Fed could still switch to an average-inflation approach and yet be far more specific than it has decided to be. What is the Taylor rule recommendation for the federal funds rate target? That is why so many distinguished monetary scholars have endorsed this approach. arrow_back. , there are ongoing discussions with the new government of Prime Minister Yoshihide Suga about how to deal with the pandemic and whether a new monetary-policy strategy is in order. Quickly uncover hidden opportunities with comprehensive data and content. The Taylor rule is one kind of targeting monetary policy used by central banks.The Taylor rule was proposed by the American economist John B. Taylor, economic adviser in the presidential administrations of Gerald Ford and George H. W. Bush, in 1992 as a central bank technique to stabilize economic activity by setting an interest rate.. Latest Data; Background and Resources; Archives; Description: We show federal funds rates from 7 simple monetary policy rules based on 3 sets of forecasts for economic conditions. When imperfect information about the model parameters is introduced, the central bank makes monetary policy mistakes, which affect welfare to a different degree under the three rules. Is the Fed considering additional changes in its procedures beyond the current mix of near-zero interest rates and large-scale asset purchases? Similarly, European Central Bank President Christine Lagarde recently told the annual ECB and Its Watchers XXI conference that the ECB is in the middle of its own “monetary policy strategy review.” And according to Bank of Japan Governor Haruhiko Kuroda, there are ongoing discussions with the new government of Prime Minister Yoshihide Suga about how to deal with the pandemic and whether a new monetary-policy strategy is in order. Powell himself acknowledged this lack of specificity at the Jackson Hole conference in August. A rule involves the exercise of control over the monetary authority in a way that restricts the monetary authority’s actions. Chapter 28, Problem 35CTQ. A discretionary policy allows policymakers to respond quickly to events. That is why so many distinguished monetary scholars have endorsed this approach. Noting that “we are not tying ourselves to a particular mathematical formula that defines the average,” he added that, “Our decisions about appropriate monetary policy … will not be dictated by any formula.” Then, in a press release the same day, the Fed’s Board of Governors explained that policy decisions would be based on “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level,” as had been previously stated. the same day, the Fed’s Board of Governors explained that policy decisions would be based on “assessments of the, of employment from its maximum level” rather than by “. In light of these discussions, it previously looked like there was a move underway to reform the entire international monetary system, with each country or region following a strategy similar to the Fed, though attuned to its own circumstances. All Rights Reserved. A strict rules-based approach does not allow for flexibility and as a result may limit choices or be inapplicable in certain circumstances, creating a need for a compromise between discretionary and rules-based policy. Only institutions subject to minimum reserves may have access to the standing facilities and participate in open market operations based on standard tenders. 1. Monetary policy is the guide that central banks use to manage money, credit, and interest rates in the economy to achieve its economic goals. Previous question Next question Get more help from Chegg. That is why so many distinguished monetary scholars have, John B. Taylor, Under Secretary of the US Treasury from 2001 to 2005, is Professor of Economics at Stanford University and a senior fellow at the Hoover Institution. First of all, if you have policy rule, like a Taylor rule, you have a strategy, which is sort of what it amounts to. Are the cracks between the BRICS beginning to show? Tn the context of monetary policy, a rule is a restriction on the monetary authority’s discre-tion. Rather than casting about for something new or simply different from the Fed, they can embark on the same rules-based-policy path that the Fed itself was on before the pandemic struck. 1. wages and price are flexible enough that economy can self-regulate 2. activist monetary policy may not work if public correctly guesses what Fed will do and counteract Chapter 28, Problem 37CTQ. A strategic approach is necessarily a rules-based approach, which is precisely how the international monetary system should be run. Examining a variety of rules is helpful because there is no agreement on a single “best” rule, and different rules can sometimes generate very different values for the federal funds rate, both for the present and for the future. Otmar Issing, a former chief economist and member of the ECB Board who was largely responsible for charting the original course of ECB policymaking, “other central banks should not blindly follow the Fed’s new strategy.”, Issing is not alone in seeing problems with the Fed’s new approach. would have a discretionary monetary policy. Check out a sample textbook solution. case for nonactivist monetary policy. Learn more about the various types of monetary policy around the world in this article. This action changes the reserve amount the banks have on hand. Let me explain why I think it is important, based on my own experience, to have a rules-based monetary policy. Among the rules considered were transparent settings for the Fed’s interest-rate policy, including the so-called Taylor rule, a price-level rule, and a modified Taylor rule to deal with the zero bound. And there are reams of additional studies showing the benefits of rules-based monetary policy. Issing is not alone in seeing problems with the Fed’s new approach. Conceptually, it is possible to have an organization responsible for conducting monetary policy that is unconstrained except by its judgment of how the economy could be improved through targeted monetary policy. And there are reams of additional studies showing the benefits of rules-based monetary policy. And there are reams of additional studies showing the benefits of rules-based monetary policy. Rules-based monetary policy gives a central bank a strict set of guidelines that dictate its future actions. First, they all use open market operations. What is the Taylor rule recommendation for the federal funds rate target? Activists argue that flexibility is a desirable quality in monetary policy; inflexibility is not. Unfortunately, they appear to be drawing the wrong lessons from the challenges they face. rules-based monetary policy. We also support the Government’s other economic aims for growth and employment. Is it one year or several years? It is understandable that Issing and others would be reluctant to go along with the Fed’s less strategic, discretionary approach, especially when there are alternatives that other central banks can pursue. For the case of Pakistan, there is good number of studies available on money-inflation relationship but the number is limited in case of rule based monetary policy.Qayyum (2006) identifies significant role of money in explaining inflation variability. Low and stable inflation is good for the UK’s economy and it is our main monetary policy aim. 1. wages and price are flexible enough that economy can self-regulate 2. activist monetary policy may not work if public correctly guesses what Fed will do and counteract 3. activist monetary policy likely destabilizing because of lags . I believe the current spillovers are largely due to these policy deviations and to unconventional monetary policy. But, unlike the vague definition that the Fed has now adopted, I explicitly defined the “average” as “the rate of inflation over the previous four quarters.” In other words, the Fed could still switch to an average-inflation approach and yet be far more specific than it has decided to be. When I first developed the Taylor rule, which has been widely discussed for three decades now, I based it on an average inflation rate. First of all, if you have policy rule, like a Taylor rule, you have a strategy, which is sort of what it amounts to. Moreover, the formal policy rules previously listed in the Monetary Policy Report all have variables to account for factors other than the inflation rate, such as the unemployment rate or the gap between real and potential GDP. He concludes that a rule-based approach is superior and … Rules as a strategy and insurance against excessive intervention. Monetary policy in Yemen is largely rudimentary and ad hoc in nature. Policy Rules and How Policymakers Use Them. But whether the focus is on “deviations” or “shortfalls,” this new approach adds unnecessary uncertainty, because shortfalls are not defined. no longer includes material on monetary-policy rules, whereas the previous six reports going had featured a whole section in which different rules were presented and compared with actual scenarios. Is it one year or several years? It is promising that the ECB and other central banks often use the word “strategy” when describing their own monetary-policy reviews. Moreover, the formal policy rules previously listed in the. Monetary policy is policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often as an attempt to reduce inflation or the interest rate to ensure price stability and general trust of the value and stability of the nation's currency. In early September, Robert Heller, a former Federal Reserve governor, argued in a letter to the Wall Street Journal that the Fed should “not target an average inflation rate of 2%.” Then, at a virtual conference convened by Stanford University’s Hoover Institution this month, Charles I. Plosser, a former president of the Federal Reserve Bank of Philadelphia, and Mickey D. Levy of Berenberg Capital Markets criticized the Fed for not being specific about the timespan over which average inflation will be measured. But whether the focus is on “deviations” or “shortfalls,” this new approach adds unnecessary uncertainty, because shortfalls are not defined. Alternative policy rules While the Taylor rule is the best-known formula that prescribes how policymakers should set and adjust the short-term policy rate in response to the values of a few key economic variables, many alternatives have been proposed and analyzed.. In the aftermath of almost a decade of unconventional monetary policy to fight the Great Recession, many political actors are contemplating new rules on monetary policy. Under rational expectations rules (2) and (3) both implement the fully optimal equilibrium by improving the output/inflation trade-off. As of this summer, its Monetary Policy Report no longer includes material on monetary-policy rules, whereas the previous six reports going had featured a whole section in which different rules were presented and compared with actual scenarios. That is why so many distinguished monetary scholars have endorsed this approach. But it no longer looks that way. This website uses cookies to improve your online experience. Solution.pdf Next Previous. Who’s Afraid of Rules-Based Monetary Policy? John B. Taylor, Under Secretary of the US Treasury from 2001 to 2005, is Professor of Economics at Stanford University and a senior fellow at the Hoover Institution. Why so many rules? A decade ago, I wrote a paper with John C. Williams, now the president of the Federal Reserve Bank of New York, titled “Simple and Robust Rules for Monetary Policy,” in which we emphasized the importance of rules-based policymaking. Implicitly, activists maintain that the more closely monetary policy can be designed to meet the particulars of … Contrast discretionary and rules-based monetary policy. A rule-based policy can be more credible because it is more transparent and easier to anticipate, unlike discretionary policy. arrow_forward. In contrast, here is what Summers said at the Stanford debate (based on a video recording): Oct 16, 2020 John B. Taylor. Issing is not alone in seeing problems with the Fed’s new approach. Many of the world’s central banks have been formally reviewing their monetary-policy strategies in light of COVID-19 and the experience leading up to the pandemic. The phrase “rules-based monetary policy” has frequented conservative circles a lot lately. The Friedman rule is a monetary policy rule proposed by Milton Friedman. 1. Then, in a press release the same day, the Fed’s Board of Governors explained that policy decisions would be based on “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level,” as had been previously stated. A decade ago, I wrote a paper with John C. Williams, now the president of the Federal Reserve Bank of New York, titled “Simple and Robust Rules for Monetary Policy,” in which we emphasized the importance of rules-based policymaking. Money › Banking Monetary Policy Rules, Interest Rates, and Taylor's Rule. Investment in creative workforce can shape new economic frontiers. Want to see the step-by-step answer? In early September, Robert Heller, a former Federal Reserve governor, argued in a letter to the Wall Street Journal that the Fed should “not target an average inflation rate of 2%.” Then, at a virtual conference convened by Stanford University’s Hoover Institution this month, Charles I. Plosser, a former president of the Federal Reserve Bank of Philadelphia, and Mickey D. Levy of Berenberg Capital Markets criticized the Fed for not being specific about the timespan over which average inflation will be measured. Milton Friedman proposed constant money growth rule: the Central Bank would simply increase the monetary base by the same percentage increase year after year (let’s say 6%, for example). Salter provides a framework to help policymakers better understand how incentives and information can affect monetary policy and discusses discretion-based and rule-based approaches to monetary policy. 3. activist monetary policy is flexible, rules-based monetary policy is not. The idea of ‘rule-based’ monetary policy is actually relatively old. How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? It is understandable that Issing and others would be reluctant to go along with the Fed’s less strategic, discretionary approach, especially when there are alternatives that other central banks can pursue. They buy and sell government bonds and other securities from member banks. Supporters of discretion argue that strict rules-based policy cannot account for real-world complexities, such as financial innovation, that can make a previously sound rule unsound. A decade ago, I wrote a paper with John C. Williams, now the president of the Federal Reserve Bank of New York, titled “Simple and Robust Rules for Monetary Policy,” in which we emphasized the importance of rules-based policymaking. A rule-based policy can be more credible because it is more transparent and easier to anticipate, unlike discretionary policy. A strategic approach is necessarily a rules-based approach, which is precisely how the international monetary system should be run. effect of lags. Inflation Targeting (Rule) A monetary policy strategy in which the central bank makes a public commitment to achieving an explicit inflation target and to explaining how its policy actions will achieve that target (Friedman's) k-percent rule. check_circle Expert Solution. STANFORD – Many of the world’s central banks have been formally reviewing their monetary-policy strategies in light of COVID-19 and the experience leading up to the pandemic. Hong Kong strife highlights uneasy corporate truce, COVID-19: We mustn’t let this crisis go to waste, Trump or Biden, new U.S. president faces troubled economy, Six key credit themes for global asset management sector in 2021, Wednesday Outlook: Dollar hovers near 2-1/2 year low; gold prices dip, Review: In November, GCC equity markets hit highest level since February 2020, Egypt's startups that got the highest funding in November, Tuesday Outlook: Gold rebounds from 5-month lows, Asian shares rise, Coronavirus vaccines will be optional, free to all in Kuwait - PM, BioNTech-Pfizer vaccine will be sent by plane or ferry to UK - exec, EU extends relief measures for COVID-hit loans to March, UK approval of COVID-19 vaccine won’t affect Germany’s doses - ministry, BioNTech-Pfizer testing if vaccine prevents COVID-19; defends UK regulatory process. © 2020 Business 24 - Online Newspaper From Ghana. Some macroeconomists thus have argued in recent years that monetary policy should be ‘rule-based’ rather than discretionary, that is, Central Bankers strictly would have to follow some kind of monetary policy rule without the authority to deviate from it. This has at least two big advantages. Suppose the inflation rate is 4 percent and the GDP gap is 5 percent. These variables could be included in the current strategy without neglecting the inflation target, as could policy rules to deal with asset purchases and their eventual unwinding. Conversely, monetarists propose a tight, fixed rule to ensure price stability. Contrast discretionary and rules-based monetary policy. Proponents of discretionary monetary policy usually maintain that, with discretion, the monetary authority can do whatever one’s preferred rule prescribes or something better. from its maximum level,” as had been previously stated. www.project-syndicate.org, Have news to share? See solution. For outright transactions, no restrictions are placed a priori on the range of counterparties. Is it one year or several years? The debate over “rules vs. discretion” was a centerpiece of disputes over monetary policy during the 1960s-1980s. Is the Fed considering additional changes in its procedures beyond the current mix of near-zero interest rates and large-scale asset purchases? Some argue that a rules-based policy is not enough anymore and that we need more international coordination. A strategic approach is necessarily a rules-based approach, which is precisely how the international monetary system should be run. What are some of the arguments for each? Expert's Answer. What are some of arguments for each ? Powell himself acknowledged this lack of specificity at the Jackson Hole conference in August. As of this summer, its Monetary Policy Report no longer includes material on monetary-policy rules, whereas the previous six reports going had featured a whole section in which different rules were presented and compared with actual scenarios. But it no longer looks that way. A rule based monetary policy envisions that monetary authority should increase money supply according to some fixed rule which should be conveyed to people before hand so that problems do not rise due view the full answer. Supporters of discretion argue that strict rules-based policy cannot account for real-world complexities, such as financial innovation, that can make a previously sound rule unsound. Check out a sample textbook solution. Moreover, the formal policy rules previously listed in the Monetary Policy Report all have variables to account for factors other than the inflation rate, such as the unemployment rate or the gap between real and potential GDP. case for nonactivist monetary policy. What is the monetary policy prescription of the market monetarists? Rules vs. discretion… In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. Moreover, there is no mention of how monetary policy will be used to generate higher inflation to make up for periods when inflation is less than 2%. A rule-based policy can be more credible because it is more transparent and easier to anticipate, unlike discretionary policy. The Central Bank of Yemen's (CBY) approach has been based on discretionary targeting of broad money without any clear target to anchor inflation expectations. One of the first to complete this process was the US Federal Reserve System, which decided to move to a new “flexible form of average inflation targeting,” as Fed Chair Jerome Powell described it in a speech at the annual Jackson Hole monetary-policy conference in August. One of the first to complete this process was the US Federal Reserve System, which decided to move to a new “flexible form of average inflation targeting,” as Fed Chair Jerome Powell described it in a. at the annual Jackson Hole monetary-policy conference in August. Rules can directly limit the actions taken by a monetary authority. It is promising that the ECB and other central banks often use the word “strategy” when describing their own monetary-policy reviews. … That is why so many distinguished monetary scholars have endorsed this approach. In fact, this would be easier done than said. Implicitly, activists maintain that the more closely monetary policy can be designed to meet the particulars of a given economic environment, the better. For instance, the monetary authority may look at macroeconomic numbers … We heard complaints about the spillovers during the stop-go monetary policy in the 1970s. Monetary policy is formulated based on inputs gathered from a variety of sources. Monetary policy affects how much prices are rising – called the rate of inflation. I know that Don has thought deeply about rules-based monetary policy. And there are reams of additional studies showing the benefits of rules-based monetary policy. Would a rules-based monetary policy produce price stability? The monetary policy of the Federal Reserve has involved varying degrees of rule- and discretionary-based modes of operation over time. In light of these discussions, it previously looked like there was a move underway to reform the entire international monetary system, with each country or region following a strategy similar to the Fed, though attuned to its own circumstances. The Federal Reserve Building is reflected on a car in Washington. But when it comes to creating rules-based monetary policy, these politicians should be aware of what aspects of monetary policy the rule is trying to govern. As Don put it in a 2007 speech at the Dallas Fed, he and I “have spent countless hours discussing how the Federal Reserve arrives at decisions about monetary policy and how it should arrive at decisions. The latest business news and analysis straight out of Ghana's capital. Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes! Although markets have responded positively to what they see as predictable monetary policy, that could change if rule-based policies result in … Check out a sample Q&A here. And, to some extent, they are right. It is promising that the ECB and other central banks often use the word “strategy” when describing their own monetary-policy reviews. Good monetary policy is conducted according to predictable rules. Key Takeaways Key Points. Screen, analyze and compare projects in the Middle East and North Africa across Infrastructure, Real Estate, Industrial and Energy sectors with Refinitiv’s Eikon. Why so many rules? The Central Bank of Yemen's (CBY) approach has been based on discretionary targeting of broad money without any clear target to anchor inflation expectations. 3. activist monetary policy is flexible, rules-based monetary policy is not. A monetary policy that is based on an expert assessment of the current economic situation Inflation Targeting (Rule) A monetary policy strategy in which the central bank makes a public commitment to achieving an explicit inflation target and to explaining how its policy actions will achieve that target In early September, Robert Heller, a former Federal Reserve governor, argued in a. that the Fed should “not target an average inflation rate of 2%.” Then, at a virtual conference convened by Stanford University’s Hoover Institution this month, Charles I. Plosser, a former president of the Federal Reserve Bank of Philadelphia, and Mickey D. Levy of Berenberg Capital Markets. check_circle Expert Answer. Email us at editorial.zawya@refinitiv.com, or send us your company press releases to pressrelease.zawya@refinitiv.com. In fact, strategic responses of rational, utility-maximising agents lead to an ex-post sub-optimal arrangement; rules ensure that – ex-po… Moreover, there is no mention of how monetary policy will be used to generate higher inflation to make up for periods when inflation is less than 2%. This paper argues in favor of a new formal monetary policy framework for Yemen emphasizing a proactive and rule-based approach with a greater direct focus on … Rules are binding. Essentially, Friedman advocated setting the nominal interest rate at zero. He is the author of Global Financial Warriors and co-author (with George P. Schultz) of Choose Economic Freedom. That is why so many distinguished monetary scholars have endorsed this approach. In adopting this “flexible” approach, the Fed seems to have shifted away from the more strategic, rules-based policy that it had been pursuing at least since 2017. When I first developed the Taylor rule, which has been widely discussed for three decades now, I. it on an average inflation rate. We set monetary policy to achieve the Government’s target of keeping inflation at 2%. Bond interest deferment proposal still being considered—BoG Gov. Unfortunately, they appear to be drawing the wrong lessons from the challenges they face. A strict rules-based approach does not allow for flexibility and as a result may limit choices or be inapplicable in certain circumstances, creating a need for a compromise between discretionary and rules-based policy. A rule based monetary policy envisions that monetary authority should increase money supply according to some fixed rule which should be conveyed to people before hand so that problems do not rise due view the full answer. All central banks have three tools of monetary policy in common. In addition to introducing a massive policy response to the COVID-19 crisis, the US Federal Reserve this year has announced a fundamental change in its overall strategy. It is promising that the ECB and other central banks often use the word “strategy” when describing their own monetary-policy reviews. Learn more about the various types of monetary policy around the world in this article. He is the author of. Access the most comprehensive database of companies and officers in the Middle East and North Africa, covering all major sectors and industries, from Refinitiv. Rather than casting about for something new or simply different from the Fed, they can embark on the same rules-based-policy path that the Fed itself was on before the pandemic struck. Recognizing the potential drawbacks of purely discretionary policy, the Federal Reserve frequently has sought to exploit past patterns and regularities to operate in a systematic way. all have variables to account for factors other than the inflation rate, such as the unemployment rate or the gap between real and potential GDP. How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? He is the author of Global Financial Warriors and (with George P. Shultz) Choose Economic Freedom. Milton Friedman was in favor of rules and he liked John׳s rule. What is the monetary policy prescription of the market monetarists? check_circle Expert Solution. Monetary policy, measures employed by governments to influence economic activity, specifically by manipulating the supplies of money and credit and by altering rates of interest. The debate over “rules vs. discretion” was a centerpiece of disputes over monetary policy during the 1960s-1980s. In monetary policy, discretion is essential to offset output fluctuations in Keynesian frameworks. When I first developed the Taylor rule, which has been widely discussed for three decades now, I based it on an average inflation rate. But we have found that very often historical regularities have been … The monetary policy framework strives to ensure the participation of a broad range of counterparties. Although markets have responded positively to what they see as predictable monetary policy, that could change if rule-based policies result in too much tightening. That is why so many distinguished monetary scholars have endorsed this approach. Activist monetary policy is flexible; non-activist (rules-based) monetary policy is not. Developing such an approach would not be difficult for the Fed to do, especially if other central banks also chose to go in this direction. And there are reams of additional studies showing the benefits of rules-based monetary policy. Among the rules considered were transparent settings for the Fed’s interest-rate policy, including the so-called Taylor rule, a price-level rule, and a modified Taylor rule to deal with the zero bound. In fact, this would be easier done than said. Rules as a strategy and insurance against excessive intervention. It is promising that the ECB and other central banks often use the word “strategy” when describing their own monetary-policy reviews. A discretionary policy allows policymakers to respond quickly to events. Fixed-Rule Policy: A fiscal or monetary policy designed to be an economic goal or target of a government. First, the Fed is run by fallible humans. In adopting this “flexible” approach, the Fed seems to have shifted away from the more strategic, rules-based policy that it had been pursuing at least since 2017. The time-(in)consistency literature, launched bu Kydland and Prescott (1977), shows that discretion-based solutions would be the first-best in terms of agents’ utility, but they are not time-consistent. And there are reams of additional studies showing the benefits of rules-based monetary policy. Republican presidential candidate Ted Cruz expressed his deep passion for implementing a monetary policy rule in a handful of presidential debates this year, including both October’s and November’s debates. Monetary policy in Yemen is largely rudimentary and ad hoc in nature. What are some of the arguments … A strategic approach is necessarily a rules-based approach, which is precisely how the international monetary system should be run. Activists argue that flexibility is a desirable quality in monetary policy; inflexibility is not. Want to see this answer and more? Nov 27 2020 09:08 PM . As of this summer, its. Oct 16, 2020 John B. Taylor In addition to introducing a massive policy response to the COVID-19 crisis, the US Federal Reserve this year has announced a fundamental change in its overall strategy. Noting that “we are not tying ourselves to a particular mathematical formula that defines the average,” he added that, “Our decisions about appropriate monetary policy … will not be dictated by any formula.”. These variables could be included in the current strategy without neglecting the inflation target, as could policy rules to deal with asset purchases and their eventual unwinding. Monetary Policy Tools . “At the very least,” argues Otmar Issing, a former chief economist and member of the ECB Board who was largely responsible for charting the original course of ECB policymaking, “other central banks should not blindly follow the Fed’s new strategy.”. That is why so many distinguished monetary scholars have endorsed this approach. How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? In adopting this “flexible” approach, the Fed seems to have shifted away from the more strategic, rules-based policy that it had been pursuing at least since 2017. MPC to fire next shots at coronavirus crisis, Banks tighten credit as COVID-19 rages—survey, Government settles prolonged inter utility legacy debt of US$203 million. Adopting a rules‐ based approach to the conduct of monetary policy would help safeguard central bank independence and promote both monetary and financial stability. A rule-based policy can be more credible because it is more transparent and easier to anticipate, unlike discretionary policy. Supporters of rules argue that discretionary monetary policy falls prey to information and incentive problems. A monetary policy that is based on an expert assessment of the current economic situation. In fact, this would be easier done than said. But, unlike the vague definition that the Fed has now adopted, I explicitly defined the “average” as “the rate of inflation over the previous four quarters.” In other words, the Fed could still switch to an average-inflation approach and yet be far more specific than it has decided to be. Monetary policy in Yemen is largely rudimentary and ad hoc in nature. Related Questions. Monetary policy, measures employed by governments to influence economic activity, specifically by manipulating the supplies of money and credit and by altering rates of interest. with John C. Williams, now the president of the Federal Reserve Bank of New York, titled “Simple and Robust Rules for Monetary Policy,” in which we emphasized the importance of rules-based policymaking. Activist monetary policy is flexible; non-activist (rules-based) monetary policy is not. Let me explain why I think it is important, based on my own experience, to have a rules-based monetary policy. See Answer.