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The Stability Properties of Monetary Constitutions

  • Pablo Paniagua EMAIL logo
Published/Copyright: June 10, 2016

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.

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Published Online: 2016-6-10
Published in Print: 2016-12-1

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