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  • rmacculloch

A Crisis of Leadership? The Rules versus Discretion Debate applied to coronavirus in NZ

One of the most profound debates regarding the conduct of monetary policy is whether a central bank should adjust the Official Cash Rate using the discretionary judgements of the Governor and Monetary Committee, or whether it should be adjusted on the basis of a simple rule. An example of a rule would be that for each 1 percentage point rise in the inflation rate, the OCR automatically will be increased by 1.2 percentage points. Proponents of the rules-based approach argue it is transparent and allows businesses to plan. A rule can avoid monetary excesses whether due to government deficits, commodity discoveries, or mistakes and politicization by governments. John Taylor, the inventor of monetary rules, once characterized the choice as one between "rules versus chaotic monetary policy".

What's this got to do with NZ's approach to the virus? Everything. A large group of Kiwi commentators want to know at what percentage vaccination rate will the government significantly open up the country. The PM has been refusing to put a number on it. She said in Parliament that there was no "magic number". In other words, she wants to apply a discretionary approach, depending on her own judgements and those of health officials as the situation unfolds. That's all well and good, but the rules-based approach suggests this can lead to chaos. Since no-one knows how those discretionary judgements will be made. On the other hand, a simple rule would state, for example, that once the vaccination rate reaches 90% then the following actions - a and b - will occur in order to open up the country.

To be fair to the government, in highly uncertain environments like dealing with the virus, where we are updating almost daily what we know about it, discretion can have an advantage over rules. Since new information may undermine the basis on which the rule was formulated. That being said, the PM seems to be exercising discretionary judgement over just too many decisions. For a techy discussion of this techy "rules versus discretion" debate, a link to an article by Mr Taylor, courtesy of the Hoover Institute at Stanford, is given below.



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