Policy makers should stick to rules instead of pursuing discretionary polices. Do you agree with the above statement? Substantiate your answer.

 Mankiw says in this regard that there has been a debate among economists is whether economic policy should be conducted by rule or by discretion Policy is said to be conducted by rule if policy-makers announce in advance how policy will respond to various situations and commit themselves to following through on this announcement.

Policy is conducted by discretion if policy-makers are free to size up events as they occur and choose whatever policy seems appropriate at the time.

Policy run by rule

Mankiw states that some economists believe that economic policy is too important to be left to the discretion of policymakers. Although this view is more political than economic, evaluating it is central to how we judge the role of economic policy.  If politicians are incompetent or opportunistic, then we may not want to give them the discretion to use powerful tools of monetary and fiscal policy. Incompetency in economic policy arises for several reasons.

Some economists view the political process as erratic, perhaps because it reflects the shifting power of special interest groups. In addition, macroeconomics is complicated and politicians often do not have sufficient knowledge of it to make informed judgements. This ignorance allows charlatans to propose incorrect but superficially appealing solutions to complex problems.

The political process often cannot weed out the advice of charlatans from that of competent economists. Opportunism in economic policy arises when the objectives of policymakers conflict with the well being of the public. Some economists fear that politicians use macroeconomic policy to further their own electoral ends. 

If citizens vote on the basis of economic conditions prevailing at the time of the election, then politicians have an incentive to pursue policies that will make the economy look good during election years. A president might cause a recession soon after coming into force to lower inflation and then stimulate the economy as the next election approaches to lower unemployment; this would ensure that both inflation and unemployment are low on election day.

Manipulation of the economy for electoral gain, called the political business cycle, has been the subject of extensive research by economists and political scientists. Distrust of the political process leads some economists to advocate placing economic policy outside the realm of politics.

Some have proposed constitutional amendments such as a balanced budget amendment that would tie the hands of legislators and insulate the economy from both incompetence and opportunism.

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