Adaptation and central banking


What or who governs central bank decisions? Most considerations focus on motivations. Instead, we consider the extent to which specific behaviors have adaptive value in the context of central banking. From that perspective, poor decisions are not the product of poor motivations. They are, instead, a product of the poor institutions within which central bank decision makers operate.

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  1. 1.

    We employ the terms ‘selection’ and ‘adaptation’ throughout. By selection, we mean the filtering process of institutions. By adaptation, we mean the durable properties of entities that remain after the filtering process has weeded out entities lacking those properties. Hence, a durable property is said to have ‘adaptive value’ if it is selected for in the filtering process.

  2. 2.

    Although Alchian (1950, p. 212) articulates his view in the context of profit maximization by firms, he maintains that it applies equally to utility maximization by consumers.

  3. 3.

    A similar point was raised in the debate between (Becker 1962, 1963; Kirzner 1962, 1963) concerning the rationality postulate.

  4. 4.

    Foreshadowing Friedman’s (1953) famous as-if argument, Alchian (1950, p. 211) held that “the analytical concepts usually associated with such behaviors are retained because they are not dependent upon such motivation or foresight.”

  5. 5.

    One might reasonably argue that the rationality postulate only has empirical content in the context of an agent’s perceived problem-environment. See Vanberg (2004).

  6. 6.

    Havrilesky (1994) surveys the early literature. See also Burns and White (2017).

  7. 7.

    The rotation is such that one president from Boston, Philadelphia, or Richmond; Cleveland or Chicago; Atlanta, St. Louis, or Dallas; and Minneapolis, Kansas City, or San Francisco always sit on the open market committee. Although none can vote, the seven out-of-rotation regional Reserve Bank presidents attend and participate in discussions at FOMC meetings.

  8. 8.

    Although Reserve Bank presidents are not bound by term limits, they are subject to mandatory retirement at age 65. If permitted by the Bank’s board, a president appointed after turning 55 can serve for 10 years or aging out at 70, whichever occurs first.

  9. 9.

    The effect is perhaps even stronger for positions of Chair and Vice Chair, insofar as they play more important roles in setting the agenda or building consensus. Along those lines, Kane (1988) models the president’s decision to appoint the Chair as a financial portfolio investment.

  10. 10.

    This is perhaps less important in recent years, when monetary policy has been conducted by varying the interest on excess reserves and the rate paid on reverse repurchase agreements. Both of these rates are determined exclusively by members of the Board of Governors. Jordan and Luther (2018) argue that the Fed’s new operating regime reduces its independence.

  11. 11.

    Our approach would seem to suggest that, if the President has the right ideas about maximizing social welfare, he will select central bankers with the right ideas about maximizing social welfare and the social-welfare-maximizing monetary policy will be adopted. However, it is important to remember that the President also is a product of selection mechanisms—and it is not obvious why one should assume that a candidate with the right ideas about maximizing social welfare will be selected as President. Indeed, a large literature following (Riker 1962) suggests that a President who concentrates benefits and disperses costs is more likely to prevail.

  12. 12.

    We do not mean to imply that the appointment process is the only mechanism at play. For example, Shughart and Tollison (1983) consider the tradeoff Fed officials face between padding their budgets and purchasing autonomy from the Treasury by remitting more seigniorage. Grier (1991, 1996) finds that monetary policy is affected by the political views of the leadership on congressional oversight committees. Hess and Shelton (2016) find that, at least prior to 1982, the Fed adjusted monetary policy in response to bills credibly threatening its power. See also Kvasnicka (2005).

  13. 13.

    We follow Wagner (1977) in focusing on seigniorage rather than more traditional accounts of a political business cycle, since the former allows incumbents to concentrate benefits through targeted spending efforts in swing districts as opposed to a broad-based reduction in unemployment or increase in output.

  14. 14.

    Even that conclusion is debatable. If implemented, the oft-touted Friedman (1969) rule likely would generate mild deflation. See also Sanchez (2012).

  15. 15.

    Colussi (2018) finds that around 43% of articles published in top general-interest economics journals are authored by scholars with an observable social tie to an editor of the journal at the time of publication.

  16. 16.

    Much the same could be said about the academic hiring process, wherein committee members are more likely to recommend and departments are more likely to extend offers to those candidates who correspond more closely to the prevailing conception of scientific merit.

  17. 17.

    For example, Posner (2017) argues that, while the Fed acted without legal authority, its response was needed to resolve the crisis.

  18. 18.

    Belongia (2007) argues that the public cannot monitor the Fed effectively. Mayer (2000) considers the extent to which academic research influences monetary policy. See also McCallum (1999).

  19. 19.

    Humphrey (1989) provides a more complete summary of Bagehot’s rules.

  20. 20.

    Much disagreement exists, to be sure. For example, Kaufman (1991) argues that central banks should supply general liquidity through open market operations rather than specific liquidity to individual financial institutions. Nonetheless, Bagehot’s classic lender-of-last-resort doctrine functions as a widely accepted baseline, from which departures might be considered.

  21. 21.

    Our statement is, perhaps, a more charitable interpretation than is warranted. Blau et al. (2013) and Blau (2017) find that the Fed’s lending decisions were influenced by political factors. See also Ramirez (2011).

  22. 22.

    There probably never has been a tighter congruence between the actions of a Fed chair and his academic work. In a series of influential papers, Bernanke (1981, 1983) argued that the severity of the Great Depression could not be accounted for by the initial collapse in liquidity alone; that the failure of banks resulted in a breakdown of financial intermediation, further straining the system. Bernanke’s public remarks (Bernanke 2008, 2009a, b) make clear that he feared a similar breakdown in the early days of the crisis; that the Fed’s unprecedented actions were intended to fight contagion.

  23. 23.

    Anderson et al. (1988) suggest the Fed’s monetary policy response in the Great Depression expanded its control over the financial system. Shughart (2011) compares the policy responses in the Great Depression and Great Recession.

  24. 24.

    In recent years, for example, the Fed has acted as if its 2% inflation target were a ceiling. Fed officials seem unwilling to risk 1970s-level inflation rates, despite the potential benefits of returning to the price level’s original trend.


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We thank David Andolfatto, Gerald P. Dwyer, Jerry Jordan, Peter Leeson, Gerald P. O’Driscoll Jr., William F. Shughart II, and Lawrence H. White for providing valuable comments on an earlier draft of this work.

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Correspondence to William J. Luther.

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Salter, A.W., Luther, W.J. Adaptation and central banking. Public Choice 180, 243–256 (2019).

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  • Adaptation
  • Bailout
  • Central bank
  • Motivation
  • Seigniorage
  • Selection
  • Research

JEL Classification

  • E31
  • E42
  • E52
  • E58