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The Institutions of Monetary Policy

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  • Mervyn King
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    Abstract

    I argue that it is useful to think about the optimal design of monetary institutions using the insights from the theory of incomplete contracts. The core of the monetary policy problem is the uncertainty about future social decisions resulting from the impossibility and the undesirability of committing our successors to any given monetary policy strategy. The impossibility stems from the observation that collective decisions cannot be enforced so that it is impossible to commit to future collective decisions. The undesirability reflects the fact that we cannot articulate all possible future states of the world. Monetary institutions expand the possibility frontier of the technology of collective decisions by raising the costs of making inefficient deviationsng from pre-announced paths. Institutions also become repositories of experience and knowledge to facilitate learning about the economic environment and communication to society as a whole. I illustrate the importance of institutional design for the operation of monetary policy by reference to three case studies: the collapse of exchange rate regimes in Brazil and the United Kingdom; currency arrangements in Iraq and their reform after the 2003 war; and the relationship between central banks and governments when the zero constraint on nominal interest rates is binding.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10400.

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    Date of creation: Apr 2004
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    Publication status: published as King, Mervyn. "The Institutions Of Monetary Policy," American Economic Review, 2004, v94(2,May), 1-13.
    Handle: RePEc:nbr:nberwo:10400

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    Cited by:
    1. Julie Nelson, 2012. "Poisoning the Well, or How Economic Theory Damages Moral Imagination," INET Research Notes 17, Institute for New Economic Thinking (INET).
    2. Bernardo Mueller & Lee Alston & Marcus Melo & Carlos Pereira, 2014. "Changing Social Contracts: Beliefs Anddissipative Inclusion In Brazil," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Grad 076, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    3. Keiichi Morimoto, 2009. "Endogenous Policy Announcement and Accountability for Inflation Target," Discussion Papers in Economics and Business 09-06, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    4. Julie A. Nelson, 2012. "Poisoning the Well, or How Economic Theory Damages Moral Imagination," GDAE Working Papers 12-07, GDAE, Tufts University.
    5. Dumitriu, Ramona & Stefanescu, Răzvan, 2013. "Decizii strategice ale politicii monetare
      [Strategic decisions of the Monetary Policy]
      ," MPRA Paper 51242, University Library of Munich, Germany, revised 05 Nov 2013.
    6. Aleksandra Maslowska, 2007. "Discussion on the Inconsistency of Central Bank Independence Measures," Discussion Papers, Aboa Centre for Economics 21, Aboa Centre for Economics.
    7. Philip Turner, 2011. "Fiscal Dominance and the Long-Term Interest Rate," FMG Special Papers, Financial Markets Group sp199, Financial Markets Group.
    8. Eloi Laurent & Jacques Le Cacheux, 2007. "What (Economic) Constitution does the EU need?," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2007-04, Observatoire Francais des Conjonctures Economiques (OFCE).
    9. Robert N McCauley & Kazuo Ueda, 2009. "Government debt management at low interest rates," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, June.
    10. Jean-Paul Fitoussi & Hélène Baudchon & Jérôme Creel & Jean-Luc Gaffard & Eloi Laurent & Jacques Le Cacheux & Patrick Musso & Michel Aglietta & Vladimir Borgy & Jean Chateau & Michel Juillard & Gil, 2005. "Potential Growth in the EU : Prospects from Technical Progress and Eastern Enlargment," Sciences Po publications info:hdl:2441/2500, Sciences Po.
    11. repec:spo:wpecon:info:hdl:2441/2500 is not listed on IDEAS
    12. Kazumasa Iwata, 2005. "Monetary policy strategies : a central bank panel," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Aug, pages 507-516.

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