An important post from Lars Christensen at The Market Monetarist this morning. Lars argues that many folks have misunderstood the argument for monetary easing in order to target NGDP growth by framing it in terms of discretionary policy. The market monetarists, he argues, are not imagining a world in which the central bank is constantly fiddling with the money supply, nor does their view reject the idea that sometimes monetary policy can be too expansionary. They are neither "doves" nor "hawks," because both of those are, again, couched within a framework of discretion.
Instead, he argues that what they want is what Buchanan wanted: a monetary constitution.
Buchanan was a constitutionalist. He was concerned about one thing and one thing only and that was how to define the rules the game – also in monetary matters. This to me is what Market Monetarism to a large extent is about (or at least should be about).
We want central banks to stop the ad hoc’ism. In fact we don’t even like independent central banks – as we don’t want to give them the opportunity to mess up things. Instead we basically want as Milton Friedman suggested to replace the central bank with a “computer”. The computer being a clear monetary policy rule. A monetary constitution if you like.
The problem with today’s monetary policy debate is that it is not a Buchanan inspired debate, but a debate about easier or tighter monetary policy. The debate should instead be about rules versus discretion and about what rules we should have.
Obviously Market Monetarists have been arguing in favour of monetary easing in both the US and the euro zone, but the argument is made within the framework of NGDP level targeting. We not always “dovish”. In fact most of us would probably have argued that monetary policy in the US and in most Europe have been overly easy for the last 40 years. But that is besides the point. The point is that we really should not have a discussion about easier versus tighter monetary policy. We should debate the rules of the game – James Buchanan would have told us that.
Free banking types might wonder whether NGDP targeting really does operate "like a computer" given the complexities of ensuring that a given change in the monetary base will have the desired effect. However, Lars does make an important point in arguing that NGDP targeting is a rule and that debates over the desirability of further monetary expansion (which Lars, I believe, does not favor at this time) should be framed in terms of what we would want a good "monetary constitution" to generate, rather than our preference over what sort of discretionary path the Fed should take.
I have written on free banking, Buchanan, and the monetary constitution in "Do We Need a Distinct Monetary Constitution?" which is part of the Buchanan symposium in JEBO. The ungated SSRN version is here.
[Cross-posted at Coordination Problem.]