Tinbergen Rule :Instruments and targets (II)

From the Tinbergen rule point of view, economic goals should be connected with the expected welfare level society might try to get , such that target and instrument connect to each other , in such a way that society can fulfil its welfare expectations. Mundell has suggested that ,in order to get that expectations done, those more effective instrument to get the target, should have a greater weight on the policy function ,such that it maximizes its impact.-
On the other hand, some times there is not sufficient instrument for every target (reduce inflation, increase employment),so there is no other alternative than to make a trade off ,which means to minimizes welfare losses. It is also feasible to have more instrument for each target. For example to reduce domestic expenditure, and current account deficits.
Uncertainty also have an important role on policy design. It is not possible for the economy, to work with real time data , to know in advance the precise value of the parameter in the reaction policy function , or the effective transmission mechanism for monetary policy . In the stabilization effort done after the Asian economies crisis rolled over, Chilean economic authorities at that time, could not anticipate the magnitude of the impact ,that increasing the interest rate would have on investment and GDP.-
Rules have the advantage of allowing markets ,to know in advance what the future economic policy course would look like given some set of assumptions .It allow to minimize the efficiency losses arising from the unexpected ,and it creates an institutional framework which support long term investment decisions plans.-
Discretionary macroeconomic policy decisions, try to get the best of every chance economic authority might intervene into the economy, without any prior optimization target to minimize welfare losses.
Rules are better than discretionary economic policy, because it reduces inefficiencies, macro variables variability and volatility .On the other hand ,rules must adapt itself to new conditions arising from the dynamic of the economy forces. Some fixed rule like that one stated by Friedman, that money supply must growth at the same pace than product growth, does not take into account the endogenous variables which influences the money demand, such that money supply might growth without getting inflationary pressure to get its way through.-
Latin America economies, are still far away from having a set of rules for macroeconomic policy stabilization purposes. Inflation is back in some countries, as long as fiscal expenditure moves forward. Thus Central Banks have a difficult task, when it comes to get back on track the macro fundamental.-