Principles of Economics- Mankiw (5th) 770

Principles of Economics- Mankiw (5th) 770 - 796 PA R T T H...

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796 PART THIRTEEN FINAL THOUGHTS CON: MONETARY POLICY SHOULD NOT BE MADE BY RULE Although there may be pitfalls with discretionary monetary policy, there is also an important advantage to it: flexibility. The Fed has to confront various circum- stances, not all of which can be foreseen. In the 1930s banks failed in record num- bers. In the 1970s the price of oil skyrocketed around the world. In October 1987 the stock market fell by 22 percent in a single day. The Fed must decide how to re- spond to these shocks to the economy. A designer of a policy rule could not possi- bly consider all the contingencies and specify in advance the right policy response. It is better to appoint good people to conduct monetary policy and then give them the freedom to do the best they can. Moreover, the alleged problems with discretion are largely hypothetical. The practical importance of the political business cycle, for instance, is far from clear. In some cases, just the opposite seems to occur. For example, President Jimmy
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