Central Banking and Mission Creep

41 Pages Posted: 8 Nov 2023 Last revised: 2 Apr 2024

See all articles by Louis Rouanet

Louis Rouanet

Western Kentucky University

Alexander William Salter

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

Date Written: February 19, 2024

Abstract

Since the 2008 financial crisis, the Fed has expanded its objectives beyond the traditional scope of monetary policy, incorporating such issues as climate change and inequality. We make three elementary but often overlooked points in response to this development. First, mission creep (especially resulting from political pressures) is not new. Second, the intensification of mission creep since the financial crisis stems from increases in both the supply of and demand for central bank activism. We argue that the floor system and accompanying unconventional monetary policies reduced the cost of mission creep to both Congress and Fed officials. Third, we explain that mission creep will likely have negative consequences for three reasons: 1) mission creep is inconsistent with rule-based policymaking and increases the scope of credible commitment problems, 2) the policies pursued following mission creep suffer from severe knowledge problems, 3) those policies make the Fed’s activities harder to monitor, especially as the number of goals proliferate. The collective results are a greater scope for regulatory capture, bureaucratic incompetence, and rent-seeking.

Keywords: Banking policy, central banking, climate change, credit allocation, democracy, Federal Reserve, incentive problem, inequality, knowledge problem, mission creep, monetary policy

JEL Classification: E42, E58, D72, D73

Suggested Citation

Rouanet, Louis and Salter, Alexander William, Central Banking and Mission Creep (February 19, 2024). AIER Sound Money Project Working Paper No. 2024-09, Available at SSRN: https://ssrn.com/abstract=4598286 or http://dx.doi.org/10.2139/ssrn.4598286

Louis Rouanet

Western Kentucky University ( email )

1 Big Red Way
Bowling Green, KY 42101-3576
United States

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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