Discretionary policy
Encyclopedia
Discretionary policy is a term used to describe macroeconomic
policy based on the ad hoc judgment of policymakers as opposed to policy set by predetermined rules. For instance, a central bank
er could make decisions on interest rates on a case by case basis instead of allowing a set rule, such as the Taylor rule
, determine interest rates.
Discretionary policies are similar to "feedback-rule policies" used by the Federal Reserve to achieve price level stability. "Discretionary policies" refer to actions taken in response to changes in the economy, but they do not follow a strict set of rules, rather, they use subjective judgment to treat each situation in unique manner. In practice, most policy changes are discretionary in nature.
Policy makers use auto stabilizers to adjust the aggregate demand.
"Discretionary policy" can refer to decision making in both monetary policy
and fiscal policy
.
According to Milton Friedman
, the dynamics of change associated with the passage of time presents a timing problem for public policy. The reason this poses a problem is because a long and variable time lag exists between:
1. The need of action and the recognition of that need
2. The recognition of a problem and the design and implementation of a policy
response; and
3. The implementation of the policy and the effect of the policy (Friedman 1953: 145).
It is because of these lags that Friedman argues that discretionary public policy will often be destabilizing. For this reason, he argued the case for general rules rather than discretionary policy.
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
policy based on the ad hoc judgment of policymakers as opposed to policy set by predetermined rules. For instance, a central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
er could make decisions on interest rates on a case by case basis instead of allowing a set rule, such as the Taylor rule
Taylor rule
In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the...
, determine interest rates.
Discretionary policies are similar to "feedback-rule policies" used by the Federal Reserve to achieve price level stability. "Discretionary policies" refer to actions taken in response to changes in the economy, but they do not follow a strict set of rules, rather, they use subjective judgment to treat each situation in unique manner. In practice, most policy changes are discretionary in nature.
"Discretionary policy" can refer to decision making in both monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
and fiscal policy
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
.
According to Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
, the dynamics of change associated with the passage of time presents a timing problem for public policy. The reason this poses a problem is because a long and variable time lag exists between:
1. The need of action and the recognition of that need
2. The recognition of a problem and the design and implementation of a policy
response; and
3. The implementation of the policy and the effect of the policy (Friedman 1953: 145).
It is because of these lags that Friedman argues that discretionary public policy will often be destabilizing. For this reason, he argued the case for general rules rather than discretionary policy.