Legislating a Rule for Monetary Policy

Abstract

Why legislate a policy rule now? Because monetary policy has recently become more discretionary, more short-term focused. My research shows that discretionary actions were, on balance, harmful. But even if one disagrees, such actions should raise concerns about a monetary system in which a great deal of power is vested in an organization with little accountability and without checks and balances. The purchase of mortgage-backed securities explicitly shifts funds to one sector and away from others, an action which should be approved by Congress. Putting taxpayer funds at risk is a credit subsidy, which should be appropriated by Congress. Some of the discretionary actions are inconsistent with the intent of the Constitution because they take monetary policy into fiscal or credit allocation areas and thereby circumvent the appropriations process.

Keywords: U.S. monetary policy, American financial policy, central banking, Federal reserve, discretionary legislation, United States monetary reform

JEL Classification: E42, E50, E52, E62