Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons’s 'Rules Versus Authorities in Monetary Policy'

Levy Economics Institute of Bard College Working Paper No. 713

15 Pages Posted: 16 Apr 2012

See all articles by Thorvald Grung Moe

Thorvald Grung Moe

Norges Bank; Bard College - The Levy Economics Institute

Date Written: April 16, 2012

Abstract

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.

Keywords: Monetary Policy, Financial Stability, Narrow Banking, Financial Regulation

JEL Classification: B22, E42, E52, G28

Suggested Citation

Moe, Thorvald Grung, Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons’s 'Rules Versus Authorities in Monetary Policy' (April 16, 2012). Levy Economics Institute of Bard College Working Paper No. 713, Available at SSRN: https://ssrn.com/abstract=2040882 or http://dx.doi.org/10.2139/ssrn.2040882

Thorvald Grung Moe (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway
47-22316097 (Phone)

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States
1-845-758-7732 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
42
Abstract Views
587
PlumX Metrics