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Scenario:

“Policy can be conducted by discretion or rules...  The increased role of expectations led to some economists at loggerheads that it would be best to force monetary policy makers to commit to following a policy rule instead of permitting them to pick the suitable policy at their discretion. However, the issue lies in credibility of policy rules as optimal policy rule is subject to a time-inconsistency problem.
This problem can be partly overcome by taking proper measures with regards to operation of the central bank.”

Required:

Examine in detail the above statement. Use proper models where needed.

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M99350

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