Is There a Self-Enforcing Monetary Constitution?

Abstract

A self-enforcing monetary constitution has rules that agents acting within the system will uphold even in the presence of deviations from ideal knowledge and complete benevolence and it thus does not require external enforcement. What would such a constitution look like? Such a constitution, I show that two regimes — a version of NGDP targeting that relies on market implementation of monetary policy, and free banking — meet these requirements for self-enforcing monetary constitutions. The analysis draws insights from political economy, and from constitutional political economy in particular.