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Title:Control of finance as a prerequisite for successful monetary policy: A reinterpretation of Henry Simons's "Rules versus Authorities in Monetary Policy" PDF Logo
Authors:Moe, Thorvald Grung
Issue Date:2012
Series/Report no.:Working paper, Levy Economics Institute 713
Abstract:Henry Simons's 1936 article 'Rules versus Authorities in Monetary Policy' is a classical reference in the literature on central bank independence and rule-based policy. A closer reading of the article reveals a more nuanced policy prescription, with significant emphasis on the need to control short-term borrowing; bank credit is seen as highly unstable, and price level controls, in Simons's view, are not be possible without limiting banks' ability to create money by extending loans. These elements of Simons's theory of money form the basis for Hyman P. Minsky's financial instability hypothesis. This should not come as a surprise, as Simons was Minsky's teacher at the University of Chicago in the late 1930s. I review the similarities between their theories of financial instability and the relevance of their work for the current discussion of macroprudential tools and the conduct of monetary policy. According to Minsky and Simons, control of finance is a prerequisite for successful monetary policy and economic stabilization.
Subjects:monetary policy
financial stability
narrow banking
financial regulation
JEL:B22
E42
E52
G28
Document Type:Working Paper
Appears in Collections:Working Papers, Levy Economics Institute of Bard College

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