A Theory of the Dynamics of Entangled Political Economy with Application to the Federal Reserve

Journal of Public Finance and Public Choice 30(1-3) 2012 [2014]: 77-102

34 Pages Posted: 13 Aug 2013 Last revised: 1 Mar 2015

See all articles by Alexander William Salter

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Date Written: September 3, 2014

Abstract

This paper develops the theory of entangled political economy by outlining a process by which the political-economic order can become increasingly entangled. The theory posits that a Big Player polity organization, a key feature of which is a lack of a hard budget constraint, exports this feature to the economy organizations it oversees. The channel through which it does so is the repeated interactions of economy and polity organizations’ agents during times of crisis. The actions of the Federal Reserve, in particular its bailing out of large financial houses in the latter part of the 20th century and the most recent financial crisis, are used as a historical illustration of this theory. The paper also discusses the possibility of constitutional craftsmanship as a solution to the undesirable consequences that accompany increased economy-polity entanglement.

Keywords: bailout, constitutional political economy, entangled political economy, Federal Reserve, financial crisis, residual claimant

JEL Classification: E6, H1, P1

Suggested Citation

Salter, Alexander William, A Theory of the Dynamics of Entangled Political Economy with Application to the Federal Reserve (September 3, 2014). Journal of Public Finance and Public Choice 30(1-3) 2012 [2014]: 77-102. Available at SSRN: https://ssrn.com/abstract=2309005 or http://dx.doi.org/10.2139/ssrn.2309005

Alexander William Salter (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

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