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Robust political economy and the Federal Reserve

Author

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  • Boettke, Peter
  • Smith, Daniel

Abstract

The economics profession not only failed to predict the recent financial crisis, but has been struggling in its aftermath to reach a consensus on the cause(s) of the crisis. While competing narratives are being offered and evaluated, the narrow scope of the debate on strictly technical aspects of monetary policy has precluded the examination of broader questions of political economy that may prove to be of greater import. Attempting to find the technically optimal policy is futile when policy is crafted and implemented in a contemporary democratic setting characterized not by omniscience and benevolence, but by fallibility and competing special interest factions. Nobel Laureates Milton Friedman, F.A. Hayek and James Buchanan each sought ways to constrain a monetary authority and each ended up rejecting the possibility of doing so. We incorporate their experiences to make a case for applying the concepts of robust political economy to the Federal Reserve. Robust political economy calls for relaxing idealized assumptions in order to seek out institutional regimes that can overcome both the epistemic and motivational hurdles that characterize contemporary democratic settings.

Suggested Citation

  • Boettke, Peter & Smith, Daniel, 2011. "Robust political economy and the Federal Reserve," MPRA Paper 32092, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:32092
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    References listed on IDEAS

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    1. Peter J Boettke & Daniel J. Smith & Nicholas A. Snow, 2011. "Been There Done That: The Political Economy of Déjà Vu," Chapters, in: Steven Kates (ed.), The Global Financial Crisis, chapter 1, Edward Elgar Publishing.
    2. Peter Leeson & J. Subrick, 2006. "Robust political economy," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 19(2), pages 107-111, June.
    3. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.
    4. James M. Buchanan, 1962. "Politics, Policy, and the Pigovian Margins," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 10, pages 204-218, Palgrave Macmillan.
    5. Kane, Edward J., 1980. "Politics and Fed policymaking : The more things change the more they remain the same," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 199-211, April.
    6. George A. Selgin & Lawrence H. White, 1994. "How Would the Invisible Hand Handle Money?," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1718-1749, December.
    7. William D. Nordhaus, 1975. "The Political Business Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(2), pages 169-190.
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    More about this item

    Keywords

    monetary policy; Federal Reserve; robust political economy; current financial crisis;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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