The Legitimacy of the Federal Reserve

40 Pages Posted: 8 Nov 2021 Last revised: 4 Jun 2023

See all articles by Christina Parajon Skinner

Christina Parajon Skinner

University of Pennsylvania - The Wharton School; European Corporate Governance Institute (ECGI); EUSFIL Jean Monnet Centre of Excellence

Carola Binder

Haverford College - Department of Economics

Date Written: November 1, 2021

Abstract

In the past several years, the Federal Reserve—America’s central bank—has considered expanding its authority into areas not typically within a central bank’s domain, such as climate change, inequality, and diversity. For some of this time, the Federal Reserve has struggled to control inflation. The Fed’s simultaneous expansion into new areas of social and economic life without congressional approval, and rising price levels, puts the Fed’s legitimacy into question.
Damage to the Fed’s legitimacy could invite legal reform: by congressional efforts to revisit its legal mandates or a Supreme Court in search of evidence to rein in the administrative state. Yet to date, the conditions of the Fed’s legitimacy remain relatively understudied, obfuscating the best way forward for the Fed to maintain its credibility.

This Article combines law and macroeconomics methodologies to derive the legal and democratic aspects of the Fed’s legitimacy in contemporary times. Our survey of 1603 American citizens in 2021 and 2022 reveals that the general public prefers the Fed to focus on inflation and interpret its mandates more narrowly. In view of these results, the Article urges the Fed to use restraint when exercising the discretion in the interstices of its legal mandates.

Keywords: Federal Reserve, central banks, law and macroeconomics

Suggested Citation

Skinner, Christina Parajon and Binder, Carola, The Legitimacy of the Federal Reserve (November 1, 2021). Stanford Journal of Law, Business, and Finance, Vol. 28, Available at SSRN: https://ssrn.com/abstract=3956847 or http://dx.doi.org/10.2139/ssrn.3956847

Christina Parajon Skinner (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

EUSFIL Jean Monnet Centre of Excellence ( email )

Italy

Carola Binder

Haverford College - Department of Economics ( email )

Haverford, PA 19041
United States

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