Forget about “hawks” and “doves” – what we need is a “monetary constitution”

Even though NGDP level targeting is becoming increasingly popular I am increasingly getting worried that people don’t really understand what Market Monetarists are talking about. The problem is that most observers and participants in the monetary policy debate continue to think about monetary policy in a highly discretionary way rather think about monetary policy in terms of rules.

Keynesian economists have traditionally been much less concerned about ensuring a rule based monetary policy so it is not surprising that they continue to think in terms of different positions in the monetary policy debate in terms of “hawks” and “doves”. However, a surprisingly large number of anti-keynesian free market oriented economists have also fallen into this trap of thinking about monetary policy issues in terms of “hawks” versus “doves”. They see themselves as “hawks” who should fight the keynesian “doves”. They tend to think that central banks only err on the inflationary side and never on the deflationary side and that the important thing therefore to always argue for tighter monetary policy.

However, the problem is not that central banks are always inflationary – they are not necessarily. Just look at the Bank of Japan or the ECB. The problem is that central banks are not ruled by a “monetary constitution”. There are no clear rules guiding the game and so they mess up things.

James Buchanan who sadly died earlier this week can hardly be said to have been a great monetary theorist (his monetary thinking was “old Chicago” – Frank Knight, Henry Simons and Lloyd Mints). However, that is not really important because what Buchanan taught us about monetary policy (and about everything else) was much more important. 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 discretions 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 are 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.

I am not trying to say James Buchanan was Market Monetarist – he was not and I am sure he would not have liked that label. But I do think that Market Monetarists’ call for a rule based monetary policy is completely in the spirit of James Buchanan.

However, many of the economists who would normally be on the same side of the argument as Market Monetarists today see us as allies of the keynesians because they see the Market Monetarist call for easier monetary policy as meaning that we are keynesians – because they equate being keynesian with easy monetary policy and therefore if you are anti-keynesian you will have to be a “hawk”.

Take some of the “hawks” on the FOMC – for example Charles Plosser. Plosser of course academically comes from an economic tradition (Real Business Cycle theory) that should lead him to stress the importance of rules. However, over the last four years I have heard very little from Charles Plosser about the need for a rules based monetary policy. Instead Plosser has been speaking in the language of discretion. In that sense he has a lot more in common with the keynesian Federal Reserve officials of the 1970s than Market Monetarists have.

That said, Market Monetarists certainly have a problem as well. If somebody wrongly sees us as the monetary version of discretionary keynesian fiscalists like Paul Krugman then we have a problem. Then we need to explain ourselves. We need to explain that we want a monetary policy based on the constitutionalist thinking of James Buchanan. We don’t care about hawks and doves – the only thing we care about is limiting the central banks ability to mess us things by introducing clear and transparent monetary policy rules that limits the discretionary powers of the central banks. In that sense we have a lot in common with Austrian gold standard proponents despite the fact we strongly disagree on the causes of the Great Recession.

So concluding, Buchanan was right – we need a monetary constitution that limits the discretionary powers for central banks. Now lets discuss what that rule should be instead of the continued fruitless discussion about easier or tighter monetary policy and stop identifying yourselves as hawks or doves. The questions is whether you believe in a monetary constitution or not.

PS I use the term “keynesian” here in a certain way that I think that most of my readers understand and agree with. However, the New Keynesian traditions would certainly be as strongly against discretionary monetary policies as Market Monetarists. I would not place for example Paul Krugman in that New Keynesian tradition as he seems very happy to endorse all kind of discretionary shenanigans.

PPS The term “constitutionalist” is not meant to mean the US Constitution and it is not some fringe US populist tradition. It a form of economic thinking.

PPPS Market Monetarism of course is not just about NGDP level targeting and rules, but also about how to think about monetary theory – for example how to think about the monetary transmission mechanism. Hence, you are not automatically a Market Monetarist just because you favour NGDP level targeting and you can think as a Market Monetarist and not necessarily favour NGDP level targeting.

See this excellent lecture by James Buchanan about the Great Recession and Economists from 2011 (Buchanan was 91 at that time!). I disagree with some of his views of the specifics of the causes of the Great Recessions, but he fully agree with his view that the fundamental reason for the Great Recession was that the failure of the “rules”.

Related posts:

NGDP targeting is not about ”stimulus”
NGDP targeting is not a Keynesian business cycle policy
Be right for the right reasons
Monetary policy can’t fix all problems
Boettke’s important Political Economy questions for Market Monetarists
NGDP level targeting – the true Free Market alternative
Lets concentrate on the policy framework
Boettke and Smith on why we are wasting our time
Scott Sumner and the Case against Currency Monopoly…or how to privatize the Fed
NGDP level targeting – the true Free Market alternative (we try again)

Leave a comment


  1. Renee

     /  January 12, 2013

    Have you missed this speech from Plosser? Or would you argue this approach is still too discretionary?

  2. Renee, I did indeed not read that Plosser speech before. The speech is not totally surprising, however, this is not what Plosser – or anybody else – have been arguing at FOMC meetings. Everybody concern themselves with what to do next instead of clearly defining the rules. It seems like the Fed now finally is moving in the direction of some very weak form of a rules – the Bernanke-Evans rule – but it have take a long, long time to get to this and I doubt that the majority of FOMC members really are willing to give up discretionary monetary policy.

  3. This is an important post Lars. I have discussed the need for a monetary constitution in light of Buchanan’s work in this JEBO piece:

    The ungated SSRN version is here:

  4. Becky Hargrove

     /  January 12, 2013

    Regarding your P.S. – a post about the “true” New Keynesian aspect would be helpful, for the definition seems to be shifting away from some previous associations it held with Krugman for instance, and yet he is still a long way from the Post Keynesians (Scott has been known to say in comments something along the lines that he is the only true New Keynesian). Is this definition mostly a reference to the job (or goals) that the transmission mechanism itself is supposed to accomplish? There may be other aspects to this that I am missing.

  5. Very important post. You are right, the framing is wrong. It allows anyone who is so inclined to dismiss market monetarist ideas as “pro-inflation” because they would entail monetary stimulus in the current circumstances. The fact that that same rule would have generally led to significantly tighter monetary policy from the late 1960s to the mid 1980s gets ignored.

  6. Great piece, Lars. I don’t think Krugman would have any problem with you characterizing him as being for discretion in monetary policy.

    Lars Christensen vs. Krugman on discretion in monetary policy

    • Mike, you are right – I don’t think Krugman would disagree with my description of his position, but I did not want to insult New Keynesian who actually favours a rule based monetary policy by claiming that they where “keynesians” of the Krugman type.

      I would, however, note in response to your post that I don’t think any rule would do. I certainly prefer an NGDP level targeting rule for large economies like the US. The reason I keep the door open for other rules is that other rules – for example what I have called the Export Price Norm could work better or equally good for for example small open economies. Remember I am always trying not to be too US centric. And neither do I want to close the do on different forms of Free Banking.

  7. Lars you’re such a nice and informative guy half the time I wonder if I got to be wrong-I feel the same about Nick Rowe and David Glasner.

    I don’t dislike Scott at all eiher though I find he seems to be quite testy these days, Maybe he feels he’s always having someone or other trying to call him out.

    My trouble with a rule though is that I always imaigne that we’ll be in a siuation where it will tie our hands with dealing with a crisis-assuming it is possible.

    In repsonse to my post Woj-a graduate student who writes the blog “Bubbles and Busts”-argues that in truth even if you have a rule as a policy goal there will still always be discretion in what method you choose for meeting it.

    I always imagine that a monetary rule will empower conservatives to say “sorry if unemployment is 20% but we’ve met our target so you’ll just have to grin and bear it.”

    It seems like a scenario where an office is on fire but the manager won’t hit the alarm and alert the fire department because the corporate office has a policy that you can’t unless you clear it with corporate first and corporate can/t be reached during the fire so rather than break a rule the manager lets the place burn down.

    That’s what no discretion sounds like to me. And again, Bernanke agrees with this-though he wants “controlled discretion.”

  8. Benjamin Cole

     /  January 14, 2013

    Excellent blogging.

    Yes, the right-wing has conflated sensible expansionary monetary—when it is really needed—with weak, indulgent federalism.

    Imagine being a American who likes smaller government, is pro-business, but detests militarism and the gold standard.

    Casting a vote in the USA is very difficult!

    And let;s not even talk about abortion, creationism, gun “rights” etc etc etc

  9. Lars, good points. I mentioned your article in my most recent post. I agree that independent central banking is certainly no panacea, as the Weimar inflation demonstrated.

  10. Sorry, but I don’t think you get it. The reason why NGDP targeting is becoming popular at the moment, especially in countries like the UK, is that the CHANGE to NGDP targeting would allow the authorities to escape the inconvenient constraint that inflation targeting presently represents (which was of course the point of implementing inflation targeting as a rule in the first place) and give the voters the easing fix that they so desperately crave. And precisely this kind of support for NGDP targeting will ensure that it is dropped or subverted when it mandates unwanted tightening in good times.

    If you want the respect of hawks like me, and you want NGDP targeting to be adopted for the right reasons, set the parameters as, say, 4% NGDP growth from around the present level of NGDP, and push the parameters as much as the principles. And watch interest in NGDP targeting die.

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