the close relationship between constrained discretion and the strategy for monetary policy known as inflation targeting. before proceeding, though, i should note that my remarks today do not necessarily represent the views of my colleagues on the board of governors of the federal reserve system or the federal open market committee. what is constrained discretion? the approach to monetary policy that i call constrained discretion can be defined by two simple and parsimonious principles. first, through its words and ( especially ) its actions, the central bank must establish a strong commitment to keeping inflation low and stable. second, subject to the condition that inflation be kept low and stable, and to the extent possible given our uncertainties about the structure of the economy and the effects of policy, monetary policy should strive to limit cyclical swings in resource utilization. in short, under constrained discretion, the central bank is free to do its best to stabilize output and employment in the face of short - run disturbances, with the appropriate caution born of our imperfect knowledge of the economy and of the effects of policy. however, a critical proviso is that, in conducting stabilization policy, the central bank must also maintain a strong commitment to keeping inflation - and, hence, public expectations of inflation - firmly under control. because monetary policy for example, even the classical gold standard contained important elements of discretion in practice, as when countries took measures to prevent their domestic money supplies from being influenced by international gold flows. moreover, the gold standard often was suspended during wars or national emergencies. to the best of my knowledge, this term was first used in connection with monetary policy by bernanke and mishkin ( 1997 ). influences inflation with a lag, keeping inflation under control may sometimes require the central bank to anticipate and move in advance of inflationary developments - that is, to engage in “ preemptive strikes ” on inflation. in my view, constrained discretion characterizes the current monetary policy framework of the united states. and it has done so to an increasing degree over time. first, since the fed under chairman paul volcker broke the back of inflation in the early 1980s, inflation in the united states has been both declining and becoming more stable. from a high of nearly 10 percent in 1980, inflation ( as measured by the core pce deflator, twelve - month rate of change ) fell to 4 percent by the end of 1984 and to 3 percent by the end of 1992. inflation breached the 2 percent barrier in the spring of 1996 and has

economic and financial conditions that followed world war i, many economic historians have credited it with promoting price stability and robust international trade and capital flows during 1870 - 1913, the so - called classical gold standard era. another example of a rule - like monetary policy institution is a currency board, such as the ones currently employed by hong kong and several eastern european nations. on the other side of the debate, advocates of discretion have firmly rejected the use of strict rules for policy, arguing that central bankers must be left free to set monetary policy as they see fit, based on their best judgment and the use of all relevant information. supporters of discretion contend that policy rules of the type advocated by friedman are simply too mechanical and inflexible for use in real world policymaking ; in particular, simple rules cannot fully accommodate special circumstances or unanticipated events. during the past few decades, for example, financial innovation and new transactions technologies have led to large and difficult - to - predict changes in the empirical relationship between money growth and the rates of growth of output and prices. if central banks had slavishly followed friedman ’ s k - percent rule for money growth during this period, critics point out, substantial economic instability would have been the likely result ; indeed, most central banks have deemphasized money growth as a policy target or indicator in recent years. more generally, opponents of rules have argued that, as a practical matter, policymakers can never credibly commit to abandoning the bank of england ’ s capable “ management ” of the pre - war gold standard was an important element in its success ; after the war, great britain no longer had the economic and financial power needed to occupy a central position in the world monetary system. proponents of discretion do not necessarily reject the use of “ rules ” or formulas - such as the famous taylor rule ( taylor, 1993 ) - as rough guides to policy, so long as policymakers remain free to deviate from the rule as they see fit. john taylor himself advocates using his eponymous rule in this way. discretion in favor of supposedly “ unbreakable ” rules. the problem, this argument runs, is that the public will understand that the central bank always has the option of abandoning its rule, should the rule happen to dictate a policy action perceived at the time as counterproductive. hence, an announcement by the central bank that it is adopting a strict policy rule would carry little credibility. although a strict rules - based framework for