The Institutions of Federal Reserve Independence
Stanford Law School, Rock Center for Corporate Governance; Princeton University
March 14, 2014
Rock Center for Corporate Governance at Stanford University Working Paper No. 139
In its century of existence, the Federal Reserve has come to occupy center stage in the formulation and implementation of national and global economic policy. And yet, from the perspective of legal theory, the mechanisms and institutions through which the Fed accomplishes its policy tasks are barely analyzed. This article undertakes that analysis and describes the way that law does — and, more interestingly, does not — shape the Fed’s vaunted independence. In the process, the article challenges the prevailing accounts of agency independence (in administrative law) and central bank independence (in the social sciences) by drawing a broader picture of legal and non-legal institutions than those literatures permit. More specifically, the article argues that the conventional analyses of Fed independence assume too much and too little regarding the way the law influences that independence. These analyses assume too little by failing to grapple with the legal and historical complexity that a much-amended statute like the Federal Reserve Act has created over the course of its century: law is regarded as a binary category, without sufficient detail to its technical complexity. And they assume too much because the law is only part — sometimes a small, irrelevant part — of the institutional arrangements that determine how the Fed makes and implements its policies. The article makes both arguments by demonstrating that nothing within the Federal Reserve Act’s independence-enhancing mechanisms are as they seem, including the Fed’s self-funding, participation of private banks’ representatives on the Fed’s monetary policy-making arm, the long tenures of the members of the Fed’s Board of Governors, and other examples frequently invoked by scholars and policy-makers, usually uncritically or incorrectly. Fed independence is not, then, simply a creature of statute, but an ecosystem of formal and informal institutional arrangements, within and beyond the control of the actors and organizations most interested in controlling Fed policy.
Number of Pages in PDF File: 59
Keywords: Federal Reserve, agency independence, central bank independence, institutional design, administrative law, banking, Federal Reserve history
JEL Classification: B22, E50, E58, G20, K20, K23, N12, N22working papers series
Date posted: June 7, 2013 ; Last revised: March 17, 2014
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