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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

Listed author(s):
  • Thorvald Grung Moe

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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File URL: http://www.levyinstitute.org/pubs/wp_713.pdf
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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
Handle: RePEc:lev:wrkpap:wp_713
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. J. Bradford De Long, 1990. "In Defense of Henry Simon's Standing as a Classical Liberal," Cato Journal, Cato Journal, Cato Institute, vol. 9(3), pages 601-618, Winter.
  2. Ronnie Phillips, 1992. "The 'Chicago Plan' and New Deal Banking Reform," Economics Working Paper Archive wp_76, Levy Economics Institute.
  3. repec:fth:harver:1498 is not listed on IDEAS
  4. Patinkin, Don, 1969. "The Chicago Tradition, the Quantity Theory, and Friedman," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 46-70, February.
  5. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, number 9929.
  6. Laidler, D., 1993. "Hawtrey, Harvard, and the Origins of the Chicago Tradition," UWO Department of Economics Working Papers 9302, University of Western Ontario, Department of Economics.
  7. Henry C. Simons, 1936. "Rules versus Authorities in Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 44, pages 1-1.
  8. J. Ronnie Davis, 1969. "Henry Simons, the Radical: Some Documentary Evidence," History of Political Economy, Duke University Press, vol. 1(2), pages 388-394, Fall.
  9. Tavlas, George S, 1997. "Chicago, Harvard, and the Doctrinal Foundations of Monetary Economics," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 153-177, February.
  10. Stigler, George J, 1974. "Henry Calvert Simons," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 1-5, April.
  11. Hyman P. Minsky & Dimitri B. Papadimitriou & Ronnie J. Phillips & L. Randall Wray, "undated". "Community Development Banking, A Proposal to Establish a Nationwide System of Community Development Banks," Economics Public Policy Brief Archive 3, Levy Economics Institute.
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