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The Institutions of Monetary Policy

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  • Mervyn King

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.

Suggested Citation

  • Mervyn King, 2004. "The Institutions of Monetary Policy," NBER Working Papers 10400, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10400
    Note: EFG IFM ME PE
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    Cited by:

    1. Alston, Lee J. & Melo, Marcus Andre & Mueller, Bernardo & Pereira, Carlos, 2013. "Changing social contracts: Beliefs and dissipative inclusion in Brazil," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 48-65.
    2. Julie A. Nelson, 2012. "Poisoning the Well, or How Economic Theory Damages Moral Imagination," GDAE Working Papers 12-07, GDAE, Tufts University.
    3. Eloi Laurent & Jacques Le Cacheux, 2007. "What (Economic) Constitution does the EU need?," Documents de Travail de l'OFCE 2007-04, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. 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).
    5. Aleksandra Maslowska, 2007. "Discussion on the Inconsistency of Central Bank Independence Measures," Discussion Papers 21, Aboa Centre for Economics.
    6. Philip Turner, 2011. "Fiscal Dominance and the Long-Term Interest Rate," FMG Special Papers sp199, Financial Markets Group.
    7. repec:spo:wpecon:info:hdl:2441/2500 is not listed on IDEAS
    8. 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 & Gilles , 2005. "Potential Growth in the EU : Prospects from Technical Progress and Eastern Enlargment," Sciences Po publications info:hdl:2441/2500, Sciences Po.
    9. Bhattarai, Keshab, 2016. "Unemployment–inflation trade-offs in OECD countries," Economic Modelling, Elsevier, vol. 58(C), pages 93-103.
    10. repec:jpe:journl:1460 is not listed on IDEAS
    11. Selgin, George, 2015. "Synthetic commodity money," Journal of Financial Stability, Elsevier, vol. 17(C), pages 92-99.
    12. Robert N McCauley & Kazuo Ueda, 2009. "Government debt management at low interest rates," BIS Quarterly Review, Bank for International Settlements, June.
    13. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    14. 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.
    15. Kazumasa Iwata, 2005. "Monetary policy strategies : a central bank panel," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 507-516.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G0 - Financial Economics - - General

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