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3 - Incentive Problems with Discretionary Central Banking

Published online by Cambridge University Press:  13 May 2021

Peter J. Boettke ,
Alexander William Salter  and
Daniel J. Smith
Peter J. Boettke
Affiliation:
George Mason University, Virginia
Alexander William Salter
Affiliation:
Texas Tech University
Daniel J. Smith
Affiliation:
Middle Tennessee State University
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Summary

Orthodox monetary policy scholarship assumes that central bankers act to maximize the public welfare. If imperfect incentives enter the model, it is on the part of the public. We challenge this assumption. Monetary policymakers are just as prone to incentive problems, which cause them to act according to their own self-interest. Furthermore, the self-interest of policymakers is not always the same thing as the public welfare. The two diverge frequently, in fact. We survey the history of the Federal Reserve and show the numerous ways discretionary central bankers have been compromised. These incentive problems are an inherent feature of discretion. They can only be eliminated by embracing true monetary rules.

Keywords

Alan GreenspanArthur BurnsCentral BankingIncentive ProblemMonetary PolicyPublic ChoicePolitical EconomyWilliam Martin
Type
Chapter
Information
Money and the Rule of Law
Generality and Predictability in Monetary Institutions
 , pp. 58 - 93
Publisher: Cambridge University Press
Print publication year: 2021

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