Implications for Monetary Reform

Abstract

This Chapter examines the prospects for monetary reform. As the opening quotation states, the perceived need for any sort of reform is a product of suffering. Suffering implies that the costs of the arrangements to be reformed are quite high relative to the benefits. This Chapter begins by considering three types of costs to society associated with the current monetary policy arrangements. The first is the cost of inflation. The first section of this Chapter indicates that a nation’s inflation performance is directly related to the autonomy of its central bank. Thus, one direction of potential monetary reform would be to increase Federal Reserve autonomy. Another type of cost of contemporary monetary policy arrangements is the cost associated with contradictory objectives for monetary policy. The second section of this Chapter deals with contradictory policy assignments. It suggests that the simplification of goals for monetary policy is another bearing that monetary reform might take. In recent years there has been increasing interest in Congress’ restricting the Federal Reserve to a single goal, price stability. The third section of the Chapter examines the idea that today’s monetary policy arrangements exist primarily to enable the Federal Reserve to create monetary surprises. Therefore, socially costly uncertainty and misdirection are essential elements of monetary policy. This suggests that the immediate disclosure of the goals and targets of monetary policy is another direction for monetary policy reform. The next two sections of the Chapter review the findings reported in earlier chapters regarding political attempts to influence monetary policy and the ability of the Federal Reserve to resist these efforts. The final section of the Chapter puts all of the insights provided by earlier sections together and adduces a number of options for practicable and complementary monetary reform.