"Because policymakers cannot be trusted to do what they say, monetary policy should be set by rules that limit the discretion of policymakers. And because monetary policy works only with a long lag, a passive policy should be preferred to an active one." In a brief essay, discuss why a reasonable person might come to these conclusions. Why are policymakers tempted to go back on their word? How might you design rules to improve the policymakers' performance?

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The Case for RuleBased Monetary Policy A Skeptics Perspective The statement presented raises concerns about the effectiveness and reliability of discretionary monetary policyarguing for a rulebased sy... View the full answer