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

Yes, policy makers should stick to rules instead of pursuing discretionary policies. This is because the greater the deviation from rules that a government displays in undertaking discretionary action even in circumstances where intervention is unanimously demanded, the less will be the credibility of policy rules announced by the government in the future. The credibility of an announced policy rules depends not only on past experience regarding a government’s ability to adhere to commitments but also on a rational evaluation about the future possibility of a government adhering to a policy rule. If the governments have the discretion to change policy at future points in time then an announced policy rule will not be credible unless it is time-consistent, at some point in time it will not be optimal for the government to follow the policy dictated by the rule. A problem might arise because the policy rule which is optimal over the entire time horizon may not be time-consistent.

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