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  • Print publication year: 2021
  • Online publication date: May 2021

3 - Incentive Problems with Discretionary Central Banking

Summary

Orthodox monetary policy scholarship assumes that central bankers act to maximize the public welfare. If imperfect incentives enter the model, it is on the part of the public. We challenge this assumption. Monetary policymakers are just as prone to incentive problems, which cause them to act according to their own self-interest. Furthermore, the self-interest of policymakers is not always the same thing as the public welfare. The two diverge frequently, in fact. We survey the history of the Federal Reserve and show the numerous ways discretionary central bankers have been compromised. These incentive problems are an inherent feature of discretion. They can only be eliminated by embracing true monetary rules.

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