Money and the rule of law: See you back in a year

A year ago, Pete Boyet, Dan Smith and I published Money and the rule of law With Cambridge University Press. We face an important question: why are central bankers so bad at their jobs, we have learned how the economy works? Our answer is that monetary policymakers rely heavily on prudence. There should be strict rules for monetary policy.

Over the past year, our arguments have become more relevant. The return of high inflation, including the disproportionate losses of the less fortunate, means that we have not yet regained control over monetary policy. Now is the time for the central bankers to tie their hands, for once.

Pete, Dan, and I wanted to write a book that was a serious contribution to the scholarship of financial economics, although still readable for concerned citizens. We are very pleased with how the project has turned out. The book has received critical acclaim, both academic and popular. John Taylor, a leading financial economist, described it as “a great read.” [and] Has been carefully researched. ”Such as outlet reviews National Review And Law and freedom Appreciated the combination of its rigidity and accessibility.

Rules work better than prudence; This is our argument in a nutshell. What is surprising is that this view has almost completely faded from the discussion of monetary policy. Rule advocates won the “rule vs. prudence” debate decades ago, but central bankers have never internalized those lessons. Instead, they adhere to the doctrine of “limited prudence,” which would allow central bankers to adhere to the rules in normal economic times, yet retain the right to act prudently in extraordinary economic times. They claim that it combines discipline with the best of both worlds, the flexibility of prudence, depending on the necessity of the moment. But it is clear that it will not. If I can decide if a rule binds me, it’s not really a rule. “Limited prudence” is only prudence.

It is our responsibility to realize the importance of the rule to show where the reasoning of the rationalist masses fails. Discretionary monetary policy contains well-known information and stimulus issues. Central bankers may not have all the information they need to formulate a real-time stabilization policy. And even if they do, they often do not have the right motivation to do so. Central banking is an innate political function. Politicians, bureaucrats and academics all influence central bankers, often undermining policy in the pursuit of personal interests rather than the public interest.

But what about the financial crisis and other extraordinary events? Does the rule really work when the sky falls? Yes. Repeatedly, central banks have shown that they do not act as responsible lenders of last resort. During the global financial crisis, for example, the Fed has repeatedly granted bail to insolvent companies. And since Kovid, the Fed has examined a number of poorly-advised credit allocation policies, with little evidence that the epidemic will cause a systemic financial crisis. We are now facing the consequences of widespread central bank interventions, such as the monetization of congressional relief spending. But the Fed has been confused by the irrelevant regulatory bubble with its mandate, partly explaining why it has thrown the ball on inflation.

Economics is a science. But political economy is an industry. The knowledge we need to build a good organization is at the crossroads of these fields. The economy tells us prudent central banking is plagued by unresolved issues. Political economy tells us that our current financial technocracy opposes the American experience of self-government and the commanded independence. Working with Pete and Dan on this project has been incredibly rewarding. But ahead we face more difficult challenges. For those of us who believe in a good economy and prudent political economy, if we want to bring the rule of law in central banking, our work is off for us.