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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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).
By ‘capture’ we mean ‘come to serve the ends of parties whose interests differ from those related to the institution’s stated purpose.’
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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
- Monetary institutions
- Monetary policy
- Rule of law