2 Pitfalls of discretionary monetary policy Starting in the 1970s, the economics profession began to recognize that the evolution of economic activity and inflation – and hence the design of optimal monetary policy – depends crucially on how households, firms, and financial market investors form their expectations regarding the future course of policy.
Conclusion One lesson the history of central banking is teaching us, applicable to the precrisis years of the “great moderation” as well as to the Great Recession, is that monetary policy works better when it follows a well-defined strategy, since the economy feeds on both its current and its expected future stance.