Summary of WP/92/63
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The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Summary of WP/92/63

“Discretionary Monetary Policy Versus Rules: The Japanese Experience During 1986-91” by Guy Meredith

The desirability of using rules as opposed to discretion in the conduct of monetary policy has been widely debated in both academic and applied circles. In achieving short-run stabilization objectives, rules limit the flexibility of policymakers to respond to shocks which, depending on the information policymakers have and how effectively they use it, may be beneficial or harmful. In addition, in countries where the credibility of policies is in question, rules may help to convey the longer-term objectives of policy to the private sector and thus favorably influence expectations.

This paper looks at rules versus discretion from the point of view of the Japanese experience during 1986-91. It focuses on the short-run stabilization properties of alternative policies, examining rules based on targets for growth in either the money supply, nominal income, or prices. A small macroeconomic model of the Japanese economy is simulated to generate a counterfactual outcome for each rule. When the simulation results are compared with the historical outcome, it appears that none of the rules would have been superior to the discretionary policies that Japan followed during this period. Of the rules considered, those based on targets for nominal income growth performed best. The usefulness of money targets would have been reduced by large shifts in money demand, while inflation targeting would not have caused policy instruments to respond quickly enough to shocks that affected future inflation. Finally, although simple rules would not have outperformed discretion, an indicator of monetary conditions that incorporates movements in the real exchange rate and the real interest rate would have been useful in assessing the effect of current policies on future activity and prices.

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