What LawMicro Has to Teach LawMacro: An Exploration of the Rule of Law and Monetary Policy

Originally published in GMU Working Paper in Economics

Among LawMacro scholars, there is a growing interest in the incorporation of distributional goals into economic institutions and policies, especially central banks. We argue that this approach threatens to undermine the rule of law in monetary policy. This is troubling because the rule of law is necessary for maintaining monetary generality and predictability. Recent macroeconomic failures, such as the Financial Crisis and the inflation following the COVID-19 pandemic, highlight the economic consequences of a lawless central bank. Unconstrained and discretionary central banking are only weakly democratically accountable, which raises legitimacy concerns with their pursuit of broader social agendas without explicit statutory authorization. We make the case for strengthening the rule of law to promote monetary generality and predictability and to better ensure democratic accountability.

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