What can Congress do to improve monetary policy?19th November 2018
This past Friday I visited Capitol Hill, and spoke to staffers for three different senators and one congressman. In my view, it is not appropriate for Congress to tell the Fed exactly how to do monetary policy—it’s better to set broad objectives. Thus I do not think Congress should mandate NGDP targeting, although I favor having the Fed adopt that policy. But I also believe that there needs to be more transparency and accountability in monetary policy. I gave each staffer a Mercatus policy brief on my views in this area; here’s a short excerpt:
In this paper, I’ll propose an alternative approach to accountability and transparency, which I believe is both more useful and more politically acceptable. In this regime, the Fed would first set specific quantifiable goals, then conduct annual evaluations of past policy decisions. The Fed would then tell Congress whether, in retrospect, the previous year’s policy stance had been too expansionary or too contractionary, and it would also provide specific metrics to justify this appraisal. . . .
While previous proposals to “audit the Fed” have been fiercely resisted by the Fed leadership, this proposal for boosting transparency and accountability is likely to be uncontroversial, with appeal to both political parties. No institution can seriously argue that its performance leaves no room for improvement or that it cannot learn from past mistakes. Indeed, the proposal has several features that might actually be attractive to the Fed chair. First, it will help Congress to better understand the Fed’s motives when unusual policy steps are needed. Second, it will tend to unify the Fed’s own decision-making process. The Fed chair will be less likely to feel like a person “herding cats” with differing views on how to make the dual mandate operational.
Unlike other reform proposals, the Fed will retain its current level of independence under this proposal. It will continue to be free to decide how to interpret the meaning of its dual mandate, to decide which policy instrument settings are best able to implement its vision of the dual mandate, and it will also be given the discretion to decide for itself how to evaluate whether past policy settings were too expansionary or too contractionary. That’s an enormous amount of independence for such a key policymaking institution. As a result, it’s hard to imagine the Fed putting up much resistance to the proposal.
Read the whole thing.
PS. There’s a “Straussian reading” of the proposal, which would be much more impactful than it might appear at first glance.
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