discretionary policy

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Policy where choices concerning policy measures, their extent, and their timing are entrusted to the judgement of policy-makers. This is contrasted with rules-based policy, where policy-makers either follow pre-announced rules, or always follow well-defined precedents. The argument for preferring rules to discretion is that if the authorities act at their discretion they may attempt to obtain short-term gain at the expense of long-term losses. For example, a monetary policy authority may exploit the short-run Phillips curve to secure an immediate increase in output at the expense of a long-term increase in inflation. The main argument for discretionary policies rather than exclusive reliance on rules is that rules can only cope with types of disturbance which were thought of in advance, at least as possibilities. If anything new and unforeseen occurs, such rules will be impossible to apply.

Subjects: Economics.

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