by Alexander William Salter
The American Institute for Economic Research
In a forthcoming book titled Money and the Rule of Law: Generality and Predictability in Monetary Institutions, Peter Boettke, Daniel Smith, and I confront one of the most important public policy dilemmas of our time: Central banks, and especially the Federal Reserve, have become a law unto themselves. Discretionary monetary policy has delivered neither macroeconomic stability nor lawful behavior. It’s time to end our experiment with central bank discretion and embrace true rules. The book, which has already received notable endorsements from respected macroeconomists and former Fed officials, is available for pre-order.
Fans of contemporary central banking will no doubt retort that they do not advocate discretion. Instead, they prefer “constrained discretion,” which is supposedly a very different thing. In a constrained discretion monetary regime, “the central bank retains some flexibility in deemphasizing inflation stabilization so as to pursue alternative short-run objectives such as unemployment stabilization. However, such flexibility is constrained to the extent that the central bank should maintain a strong reputation for keeping inflation and inflation expectations firmly under control.”