Becker on Rules vs. Discretion in Monetary Policy

Gary Becker provides a one-sided argument in favor of fixed rules governing monetary policy. He doesn't actually mention what rule he is exactly in favor of (inflation targeting, GDP growth targeting, factoring in unemployment...). He just says some rule is better than no rule, and while is arguments in favor of a rule-based monetary system make sense, he fails to mention any of its drawbacks.

Monetary rules are implicitly track long-run targets based on some aspect of NAIRU or whathaveyou. Of course, monetary policy is our government's chief way of tweaking the economy to alter business cycles (speeding up the economy to prevent a bad recession, or slowing it down to prevent runaway inflation). Take that away and all you are left with is politics (government spending and taxes) to tweak the economy. And THAT is a scary thought. Beyond that, taking away a monetary policymaker's discretion to change money supply / set interest rates, takes away the 'fudge' factor and assumes that we can set accurate rules - which may in fact not be the case.

But one would expect a Chicago school economist to be in favor of rules for precisely the above reasons. There is a certain unnatural comfort some economists find in the grand supposedly 'intuitive' assumptions and math models required to use such rules in the real world as opposed to relying on human behavior. There is a comfort in believeing that there are no big short-run market problems.

Sometimes what is comfortable is illusion.

Having said all that, I found Richard Posner's response to Becker a bit more even-handed and thoughtful:

"On the broader issue of rules versus discretion, I doubt that generalization is possible. Rules have great virtues, but they are limited because they are necessarily based on information possessed by the rulemaker when the rule was made. No rulemaker is omniscient. After the rule is promulgated, unforeseen circumstances are likely to arise to which the rule will be maladapted. The inflexibility of rules has to be traded off against the benefits in simplicity, clarity, and ease of compliance and application that rules confer. The tradeoff will not always favor rules."