Rules Versus Discretion Across Microprudential, Macroprudential and Monetary Policy

This paper will examine the history and contemporary manifestations of the rules-versus-discretion dichotomy in central banking. The benefits and drawbacks of rules and discretion have been discussed extensively in the literature on central banking over many decades. Such discussions have tended to concentrate on specific functions of central banks, notably monetary policy, micro-prudential supervision and, latterly, macro-prudential policy. The article will review the literature on the rules-versus-discretion dichotomy, highlighting commonalities and differences in the economic and public policy rationales that have been offered for either approach in each of these three central banking policy domains. The article will then discuss developments in the use of rules and discretion in central banking after the financial crisis by a selection of the major advanced economy central banks drawing on their published outputs and publically available information. It will adopt a ‘historical institutionalist’ analytical perspective to explain the limited trend towards convergence around hybrid approaches (combining rules and discretion) and the reasons for enduring differences between jurisdictions.