ABSTRACT
Elected politicians typically have an incentive to support expansionary policies that boost the incumbent’s political standing by temporarily lowering both interest rates and unemployment. However, a great deal of empirical evidence suggests that, over time, higher rates of monetary expansion merely result in higher interest rates and prices without any sustained employment gains. Moreover, even though proposals for more complicated monetary rules or constraint systems are popular in the academic world, such proposals do not appear to have generated much support in public policy circles. The general trend of macroeconomic research findings over the past decade has been to undermine the case for discretionary national monetary policy making. This, of course, weakens the argument against the adoption of fixed rules for monetary policy. Modern analysis suggests, however, that the issue is not so clearcut. One must distinguish between temporarily pegged and more permanently fixed exchange rates and consider the mechanics by which monetary policies react to balance of payments developments.
