Wednesday, July 29, 2009

Monetary policy Discretion

Now that we defined a monetary policy rule, defining monetary policy discretion is straightforward. Simply stated, monetary policy discretion allows for Federal Reserve policy making in the absence of monetary policy rule.
for example, we the Fed ‘s Federal Open market Committee meets eight times each year. Between meetings, a few FOMC members and staff officials confer daily. One type of discretionary monetary policy would entail day-to-day variations of Fed policy in light of economic events as they transpire, with minimal constraints on Open-market operations, discount window policy, or reserve requirements.
More generally, Fed discretion occurs whenever the Fed decides to respond to economic events in ways it had not previously planned. Most policy makers, including the Fed, Plot out broad strategies for their policies. If they stick closely to these strategies, then they follow policy rules. If They depart from them, however, they use their discretion. They respond to economic events as they occur, rater than turing a blind eye to temporary economic fluctuations.

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