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Robust political economy and the Federal Reserve

  • Boettke, Peter
  • Smith, Daniel

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32092.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:32092
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  1. 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.
  2. Peter Leeson & J. Subrick, 2006. "Robust political economy," The Review of Austrian Economics, Springer, vol. 19(2), pages 107-111, June.
  3. Boettke, Peter & Smith, Daniel & Snow, Nicholas, 2011. "Been there done that: the political economy of Déjà Vu," MPRA Paper 32094, University Library of Munich, Germany.
  4. 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.
  5. 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.
  6. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
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