Abstract
The financial crisis brought about a higher degree of monetary policy unpredictability. To anchor expectations and promote nominal stability, there is a need for predictable monetary rules or stable constitutions. This paper’s purpose is to define the general expectational properties that monetary constitutions should possess to work as coordination devices. I use Buchanan’s predictability criterion, as well as the expectational monetary transmission mechanism, to propose that monetary constitutions should be considered stable as long as they contain dynamics allowing self-reinforcing expectations of monetary neutrality. Self-reinforcement of expectations is an integral property of monetary constitutions for them to be agents of coordination and therefore stable. I find that these expectational properties are consistent with the stability properties established in the constitutional literature.
Acknowledgements
I am grateful to Steve Horwitz, Adam Martin, Emily Skarbek, and two anonymous referees for extremely helpful comments. I thank Harry David and Victoria Finn for editing assistance.
References
Bernanke, B., and M. Woodford. 1997. “Inflation Forecasts and Monetary Policy.” Journal of Money, Credit and Banking 29 (4): 653–84.10.3386/w6157Search in Google Scholar
Beckworth, D. 2012a. “How the Fed’s Mishandling of the Productivity Boom Helped Pave the Way for the Housing Boom.” In Boom and Bust Banking: The Causes and Cures of the Great Recession, edited by B. David Oakland, CA: Independent Institute.Search in Google Scholar
Beckworth, D. (Ed). 2012b. Boom and Bust Banking: The Causes and Cures of the Great Recession. Oakland, CA: Independent Institute.Search in Google Scholar
Board of Governors of the Federal Reserve System. 2009. ‘Money Stock Measures-H.6′ and ‘Assets and Liabilities of Commercial Banks in the U.S.-H.8.’ Available at http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm.Search in Google Scholar
Boettke, P. J. 1998. “James M. Buchanan and the Rebirth of Political Economy” In Economics and Its Discontent: Dissent in 20th Century Economics, edited by H. Richard and P. Steven. Northampton, MA: Edward Elgar.10.4337/9781035303250.00007Search in Google Scholar
Brennan, G., and J. M. Buchanan. 1981. ‘Monopoly in Money and Inflation.’ Hobart Paper 88. London: Institute of Economic Affairs.Search in Google Scholar
Brennan, G., and J. M. Buchanan. 2000 [1985]. The Reason of Rules: Constitutional Political Economy. Vol. 10 of Collected Works of James M. Buchanan. Indianapolis, IN: Liberty Fund.10.1017/CBO9780511895937Search in Google Scholar
Buchanan, J. 1962. “Predictability: The Criterion of Monetary Constitutions.” In In Search of a Monetary Constitution, edited by L. B. Yeager. Cambridge: Harvard University Press.10.4159/harvard.9780674434813.c5Search in Google Scholar
Buchanan J. 1964 [1978]. “What Should Economists Do?” Southern Economic Journal30 (3): 213–22.10.2307/1055931Search in Google Scholar
Buchanan J. 1990. “The Domain of Constitutional Economics.” Constitutional Political Economy 1 (1).10.1007/BF02393031Search in Google Scholar
Buchanan, J. 2008. “Same Players, Different Game: How Better Rules Make Better Politics.” Constitutional Political Economy 19:171–9.10.1007/s10602-008-9046-4Search in Google Scholar
Buchanan, J. 2010. “The Constitutionalization of Money.” Cato Journal 30 (2): 251–8.10.1080/09540962.2010.492189Search in Google Scholar
Cachanosky, N. 2015. ‘Can NGDP Targeting be too Loose?’ Working Paper Available at SSRN, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2546603.Search in Google Scholar
Calomiris, C. W., and S. H. Haber. 2014. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton, NJ: Princeton University Press.10.1515/9781400849925Search in Google Scholar
Congleton, R. D. 2014. “The Contractarian Constitutional Political Economy of James Buchanan.” Constitutional Political Economy 25:39–67.10.1007/s10602-013-9151-xSearch in Google Scholar
Foley, M. 1990. The Silence of Constitutions. New York: Routledge, Chapman, and Hall.Search in Google Scholar
Friedman, M. 2014 [1960]. A Program for Monetary Stability. Reprint, City, CT: Martino Publishing.Search in Google Scholar
Friedman, M. 1994. Money Mischief: Episodes in Monetary History. Orlando, FL: Harcourt Brace.Search in Google Scholar
Gerlach, P., P. Hördahl, and R. Moessner. 2011. “Inflation Expectations and the Great Recession.” BIS Quarterly Review (March): 39–51.Search in Google Scholar
Hadfield, G. K., and B. R. Weingast. 2013. “Constitutions as Coordinative Devices”. USC Law Legal Studies Paper 11–28.Search in Google Scholar
Hardin, R. 1989. “Why a Constitution.” In The Federalist Papers and the New Institutionalism, edited by G. Bernard and W. Donald. New York: Agathon Press.Search in Google Scholar
Hayek, F.A. 1978 [1960]. The Constitution of Liberty. Chicago, IL: University of Chicago Press.Search in Google Scholar
Hayek, F.A. 1999 [1925]. “The Monetary Policy of the United States after the Recovery from the 1920 Crisis.” In Good Money, Part 1. Vol. X of the Collected Works of F. A. Hayek, edited by K. Stephen. Chicago, IL: University of Chicago Press.Search in Google Scholar
Hetzel, R. L. 2009. “Monetary Policy in the 2008–2009 Recession.” Economic Quarterly 95 (2): 201–33.Search in Google Scholar
Hetzel, R. L. 2012. The Great Recession: Market Failure or Policy Failure? Cambridge: Cambridge University Press.10.1017/CBO9780511997563Search in Google Scholar
Horwitz, S. 2000. Microfoundations and Macroeconomics: An Austrian Perspective. London: Routledge.10.4324/9780203456309Search in Google Scholar
Horwitz, S. 2011. “Do We Need a Distinct Monetary Constitution?” Journal of Economic Behavior & Organization 80 (2): 331–8.10.1016/j.jebo.2011.07.010Search in Google Scholar
Kohler, E. A., V. J. Vanberg, and L. H. White. 2015. Renewing the Search for a Monetary Constitution: Reforming Government’s Role in the Monetary System. Washington, DC: Cato Institute.Search in Google Scholar
Koppl, R. 2014. ‘From Crisis to Confidence: Macroeconomics after the Crash.’ Hobart Paper Series 175. London: Institute of Economic Affairs.10.2139/ssrn.3903963Search in Google Scholar
Lucas, R. E. 1972. “Expectations and the Neutrality of Money.” Journal of Economic Theory 4 (2): 103–24.10.4159/harvard.9780674067851.c1Search in Google Scholar
Lucas, R. E. 1996. “Nobel Lecture: Monetary Neutrality.” Journal of Political Economy 104 (August): 661–82.10.1086/262037Search in Google Scholar
Leeson, P. T., and J. Robert Subrick. 2006. “Robust Political Economy.” Review of Austrian Economics 19 (2): 107–11.10.1007/s11138-006-7342-7Search in Google Scholar
Ordeshook, P. C. 1992. “Constitutional Stability.” Constitutional Political Economy 3 (2): 137–75.10.1007/BF02393118Search in Google Scholar
Paniagua, P. 2015. “The Robust Political Economy of Monetary Institutions: Central Banking and Free-Banking.” The Review of Austrian Economics 29 (1): 15–32.10.1007/s11138-015-0315-ySearch in Google Scholar
Pennington, M. 2011. Robust Political Economy: Classical Liberalism and the Future of Public Policy. Northampton, MA: Edward Elgar.10.4337/9781849809054Search in Google Scholar
Romer, C. D. 1992. “What Ended the Great Depression?” Journal of Economic History 52 (4): 757–84.10.3386/w3829Search in Google Scholar
Romer, C. D., and D. H. Romer. 2013. “The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression.” American Economic Review: Papers & Proceedings 103 (3): 66–72.10.3386/w18746Search in Google Scholar
Salter, A. W. 2014. “Is There a Self-Enforcing Monetary Constitution?” Constitutional Political Economy 25 (3): 280–300.10.1007/s10602-014-9163-1Search in Google Scholar
Schwartz, A. J. 1987. “Lessons of the Gold Standard Era and the Bretton Woods System for the Prospects of an International Monetary Constitution.” In Money in Historical Perspective, edited by S. Anna Chicago, IL: University of Chicago Press.10.7208/chicago/9780226742298.001.0001Search in Google Scholar
Selgin, G. A. 1988. The Theory of Free Banking: Money Supply under Competitive Note Issue. Totowa, NJ: Rowman and Littlefield.Search in Google Scholar
Selgin, G. A. 1997. ‘Less than Zero: The Case for a Falling Price Level in a Growing Economy.’ Hobart Paper 132. London: Institute of Economic Affairs.10.1111/j.1468-0270.1997.tb01245.xSearch in Google Scholar
Selgin, G. A., and L. H. White. 2005. “Credible Currency: A Constitutional Perspective.” Constitutional Political Economy 16 (1): 71–83.10.1007/s10602-005-5853-zSearch in Google Scholar
Sugden, R. 2005. The Economics of Rights, Cooperation and Welfare, 2nd ed. New York: Palgrave Macmillan.10.1057/9780230536791Search in Google Scholar
Sumner, S. 1989. “Using Futures Instruments Prices to Target Nominal Income.” Bulletin of Economic Research 41 (2): 157–62.10.1111/j.1467-8586.1989.tb00287.xSearch in Google Scholar
Sumner, S. 2012. “How Nominal GDP Targeting Could Have Prevented the Crash of 2008.” In Boom and Bust Banking: The Causes and Cures of the Great Recession, edited by B. David. Oakland, CA: Independent Institute.Search in Google Scholar
Sutter, D. 1997. “Enforcing Constitutional Constraints.” Constitutional Political Economy 8:139–50.10.1023/A:1009064425503Search in Google Scholar
Taleb, N. N. 2012. Antifragile: Things That Gain From Disorder. New York: Random House.Search in Google Scholar
Taylor, J. B. (Ed.) 1999. Monetary Policy Rules. Chicago, IL: University of Chicago Press.10.7208/chicago/9780226791265.001.0001Search in Google Scholar
Taylor, J. B. 2009. Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. Stanford, CA: Hoover Institution Press.Search in Google Scholar
Taylor, J. B. 2012. “Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras.” Journal of Money, Credit, and Banking 44 (6): 1017–32.10.1111/j.1538-4616.2012.00521.xSearch in Google Scholar
Temin, P., and B. Wigmore. 1990. “The End of One Big Deflation.” Explorations in Economic History 27 (4): 483–502.10.1016/0014-4983(90)90026-USearch in Google Scholar
White, L. H. 2013. “Antifragile Banking and Monetary Systems.” Cato Journal 33 (3): 471–84.Search in Google Scholar
Woodford, M. 2003. Interest and Prices. Princeton, NJ: University of Princeton Press.Search in Google Scholar
Woolsey, W. W. 2012. “The Great Recession and Monetary Disequilibrium.” In Boom and Bust Banking: The Causes and Cures of the Great Recession, edited by B. David. Oakland, CA: Independent Institute.Search in Google Scholar
Yeager, L. B. 1986. “The Significance of Monetary Disequilibrium.” Cato Journal 3 (1): 369–99.Search in Google Scholar
©2016 by De Gruyter
Articles in the same Issue
- Frontmatter
- Articles
- The Stability Properties of Monetary Constitutions
- Thomas Hodgskin, Socialist or Anti-Privilege Libertarian?
- Quality of Justice as an Institutional Game. Insights from the Italian Case
- Descartes, Rousseau, de Gaulle: France’s Constitutional Waltz of Plebiscitarian Caesarism
- Book Review
- Review of “Speaking Truth to Power,”, J.A. Cavallo and C. Lottieri: Annali di Italianistica
Articles in the same Issue
- Frontmatter
- Articles
- The Stability Properties of Monetary Constitutions
- Thomas Hodgskin, Socialist or Anti-Privilege Libertarian?
- Quality of Justice as an Institutional Game. Insights from the Italian Case
- Descartes, Rousseau, de Gaulle: France’s Constitutional Waltz of Plebiscitarian Caesarism
- Book Review
- Review of “Speaking Truth to Power,”, J.A. Cavallo and C. Lottieri: Annali di Italianistica