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Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons's Rules versus Authorities in Monetary Policy

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  • Thorvald Grung Moe

Abstract

Henry Simons's 1936 article "Rules versus Authorities in Monetary Policy" is a classical reference in the literature on central bank independence and rule-based policy. A closer reading of the article reveals a more nuanced policy prescription, with significant emphasis on the need to control short-term borrowing; bank credit is seen as highly unstable, and price level controls, in Simons's view, are not be possible without limiting banks' ability to create money by extending loans. These elements of Simons's theory of money form the basis for Hyman P. Minsky's financial instability hypothesis. This should not come as a surprise, as Simons was Minsky's teacher at the University of Chicago in the late 1930s. I review the similarities between their theories of financial instability and the relevance of their work for the current discussion of macroprudential tools and the conduct of monetary policy. According to Minsky and Simons, control of finance is a prerequisite for successful monetary policy and economic stabilization.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_713.

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Date of creation: Apr 2012
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Handle: RePEc:lev:wrkpap:wp_713

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Keywords: Monetary Policy; Financial Stability; Narrow Banking; Financial Regulation;

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