Published online by Cambridge University Press: 13 May 2021
We analyze the information problems inherent in discretionary monetary policy. Discretionary central bankers confront immense informational burdens. Some of these are technical problems only, and can in principle be overcome. But there is also a genuine knowledge problem involved in discretionary monetary policy: reacting in real time to changes in the demand for money. This problem is unsolvable. It renders discretionary central banking systematically unlikely to achieve macroeconomic stability. In contrast, rules-based policy does not confront a knowledge problem.
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