ABSTRACT
One of the longest miming debates in macroeconomics is the relative desirability of rules versus discretion for maeroeconomic policymakers. This chapter discusses the evolution of the optimal policy rule literature to deal with economies facing an array of shocks. One sees a wide array of conflicting proposals offered for monetary reform in the emerging market economies. Viewing the design of monetary institutions from a constitutional rather than an optimal policy perspective—i.e., as a system of constraints rather than as a set of optimal policy rules—is a major step forward conceptually. In there has been substantially increased interest in the possible benefits of central bank independence as an institutional mechanism to help control inflationary biases. The objectives of monetary policy should be determined through the political process in a constitutional or quasi-constitutional manner. Monetary reform should be viewed as part of a more comprehensive institutional package designed to promote monetary stability and improve the operation of the economy.
