Monetary Rules: Evolution, Shortcomings, and Empirical Evaluation of Usage

Abstract

This study provides a description of the monetary rules evolution, applied in Central banks’ monetary policy decisions across different countries, and the research defines its limitations. The authors underline the increasing importance of monetary rules over several last decades, providing predictability of monetary policy. And, consequently, its effectiveness compared with macroeconomic targets, which Central banks are obliged to reach. The paper provides a discussion of rules’ configurations and implementation practices between economists and methodological foundations of monetary rules’ application. The application has been considered in the historical and economic context, which peculiarities frequently lead to economists’ radical revision of monetary policy instruments’ usage in academics and in practice including regimes of targeting exchange rate, money supply and inflation. The authors conduct as empirical assessment of the FRS, the ECB and Bank of Russia monetary policy decisions’ compliance with monetary rules, based on vintage data and key rate variations determined by current macroeconomic conditions and its dynamics. The assessment demonstrates that Bank of Russia followed monetary rules logic at most from the end of 2013 to the end of 2021. In the final part, the researchers make an attempt to answer a question, if monetary rules, which configurations depend on Central banks’ targets to a large extent, are benchmarks for the policy assessment. © 2023 Publishing House of the Higher School of Economics. All rights reserved.