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Money and the rule of law

The Review of Austrian Economics volume 30, pages 517–532 (2017)Cite this article

Abstract

Contemporary monetary systems permit those in positions of authority to exercise discretionary power in the pursuit of monetary policy objectives. We argue there are strong prima facie reasons why this is normatively problematic. Engaging the literature on the rule of law, we argue that a general and nondiscriminatory rule ought to apply to monetary institutions for the same reasons such a rule ought to apply to other important institutions. We recognize that this prima facie case may be overcome by sufficiently strong consequentialist concerns, but show that these concerns are ungrounded: discretionary monetary authorities, both in theory and practice, perform poorly. We thus affirm the importance of the rule of law for monetary policy as a requisite for both non-arbitrary governance and macroeconomic stability.

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Notes

  1. Central bankers make up for this lack of knowledge through the use of macroeconomic models calibrated with various macroeconomic statistics. Whether this substitute is ‘good enough for government work,’ i.e. works passably well, we consider in a subsequent sub-section. See also Salter and Smith (2016).

  2. By ‘capture’ we mean ‘come to serve the ends of parties whose interests differ from those related to the institution’s stated purpose.’

  3. Mankiw advises further skepticism concerning the extent to which the rules vs. discretion debate has had any practical effects on central banking. “[T]he institutional changes we have observed are at best loosely connected to the issues raised in the theoretical literature” (Mankiw 2006, p. 16).

  4. Taylor (2012a, pp. 1024–1030) also provides evidence that this was partially causally attributable to monetary factors.

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Authors and Affiliations

  1. Department of Agricultural and Applied Economics, Texas Tech University, Lubbock, TX, 79410, USA

    Glenn L. Furton

  2. Rawls College of Business, Texas Tech University, Lubbock, TX, 79410, USA

    Alexander William Salter

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  1. Glenn L. Furton
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  2. Alexander William Salter
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Correspondence to Alexander William Salter.

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Furton, G.L., Salter, A.W. Money and the rule of law. Rev Austrian Econ 30, 517–532 (2017). https://doi.org/10.1007/s11138-017-0375-2

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Keywords

  • Liberalism
  • Monetary institutions
  • Monetary policy
  • Rule of law