Monetary Rules: Is a Constrained Central Bank as Good as Gold?

Abstract

I consider whether a rules-based fiat money system can outperform the gold standard in delivering economic stability. I discuss the potential objectives of monetary policy in Section 1 and the means for achieving the objective in Section 2. I turn to questions of political economy in Section 3. In particular, I consider whether the rule should specify the objective or the means of monetary policy and whether the rule should be imposed by Congress or adopted voluntarily at the discretion of the Fed. In general, I maintain that fiat money might outperform a gold standard if the central bank is committed to a well-designed monetary rule, but that achieving and maintaining such a commitment is easier said than done.

Keywords: central bank, commodity money, fiat money, gold standard, monetary policy, monetary rule, rules vs. discretion

JEL Classification: E52, E58, N10, P16