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2 - Knowledge Problems with Discretionary Monetary Policy

Published online by Cambridge University Press:  13 May 2021

Peter J. Boettke ,
Alexander William Salter  and
Daniel J. Smith
Peter J. Boettke
Affiliation:
George Mason University, Virginia
Alexander William Salter
Affiliation:
Texas Tech University
Daniel J. Smith
Affiliation:
Middle Tennessee State University
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Summary

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.

Keywords

Central BankingInformation ProblemKnowledge ProblemMonetary Policy
Type
Chapter
Information
Money and the Rule of Law
Generality and Predictability in Monetary Institutions
 , pp. 22 - 57
Publisher: Cambridge University Press
Print publication year: 2021

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