John Cochrane - Central Bank Governance and Oversight Reform

Central Bank Governance and Oversight Reform

The Hoover Institution gratefully acknowledges the following individuals and foundations for their significant support of the Working Group on Economic Policy and this publication:

Lynde and Harry Bradley Foundation

Preston and Carolyn Butcher

Stephen and Sarah Page Herrick

Michael and Rosalind Keiser

Koret Foundation

William E. Simon Foundation

John A. Gunn and Cynthia Fry Gunn

Central Bank Governance and Oversight Reform

EDITED BY

John H. Cochrane

John B. Taylor

CONTRIBUTING AUTHORS

Michael D. Bordo

Alex Nikolsko-Rzhevskyy

David H. Papell

Charles I. Plosser

Ruxandra Prodan

George P. Shultz

Paul Tucker

Carl E. Walsh

Kevin M. Warsh

John C. Williams

HOOVER INSTITUTION PRESS

STANFORD UNIVERSITY

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Hoover Institution Press Publication No. 666

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Contents

John H. Cochrane and John B. Taylor

Paul Tucker

: John H. Cochrane

: Michael D. Bordo, John H. Cochrane, Peter Fisher, Robert Hodrick, Charles I. Plosser, George P. Shultz, John B. Taylor, Paul Tucker, Kevin M. Warsh

David H. Papell, Alex Nikolsko-Rzhevskyy and Ruxandra Prodan

: Michael Dotsey

: John H. Cochrane, Michael Dotsey, Peter Fisher, Andrew Levin, David H. Papell, Charle I. Plosser, John B. Taylor, Paul Tucker, Carl E. Walsh, John C. Williams

Carl E. Walsh

: Andrew Levin

: John H. Cochrane, Michael Dotsey, David H. Papell, John B. Taylor, Carl E. Walsh, John C. Williams

Kevin M. Warsh

: Peter Fisher

: Binyamin Appelbaum, Michael D. Bordo, John H. Cochrane, Michael Dotsey, Peter Fisher, Andrew Levin, Charles I. Plosser, George P. Shultz, Paul Tucker, Kevin M. Warsh, John C. Williams

Michael D. Bordo

: Mary H. Karr

: Michael D. Bordo, John H. Cochrane, Peter Fisher, Mary H. Karr, Andrew Levin, Charles I. Plosser, George P. Shultz, John B. Taylor, Paul Tucker, Kevin M. Warsh, John C. Williams

Charles I. Plosser, George P. Shultz, and John C. Williams

: Michael J. Boskin, John H. Cochrane, Peter Fisher, Robert Hodrick, Andrew Levin, David Papell, Charles I. Plosser, John B. Taylor, Paul Tucker, Kevin M. Warsh, John C. Williams

Preface

John H. Cochrane and John B. Taylor

At the time we were organizing this conference, most of the voluminous commentary about the Federal Reserve System centered on what decisions it should take. Should the Fed raise interest rates? How soon? How much?

We thought the conference could make more progress by focusing on a different and deeper set of questions. How should the Fed make decisions? How should the Fed govern its internal decision-making processes? How should Congress, from which the Fed ultimately receives its authority, oversee the Fed? Central bank independence is a great virtue, but independence in a democracy must come with clear limits and a limited scope of action. What should those limits be? What is the trade-off between greater Fed power and less Fed independence? How should Congress manage its fundamental oversight role? Several bills in Congress stipulate more rules-based policy and consequent accountability, along with deeper monetary reforms. Are these bills a good idea? How should they be structured?

The distinguished scholars and policymakers at the conference, whose contributions and commentary are represented in this conference volume, do not disappoint in their analysis of these and related questions.

Paul Tuckers opening paper, How Can Central Banks Deliver Credible Commitment and be Emergency Institutions? leads off with a central conundrum: in general, people seem to want central banks to follow rule-based policy in normal times, but people expect banks to take a much more discretionary do-what-it-takes approach to stopping financial crises. Tucker asks if these two hats can be worn at once. He builds up to the basic conclusion: LOLR [lender of last resort] liquidity reinsurance policy can be systematic, and should be framed within a regime, just as normal-times monetary policy should be so framed.

Tucker starts by thinking through the limits on the central banks tools. Should the central bank, even in a crisis, be legally limited to traditional open market operations, exchanging reserves for short-term treasuries? Or should the central bank be free to purchase many different kinds of assets in crises? He notes the many restrictions, including central bank independence, that stand in the way of inflationary finance in normal times, but which may be inappropriate during crises.

Looking at the modern financial system, Tucker concludes that money, credit, and finance are not separable. He advocates an integrated money-credit constitution consisting of inflation targeting plus a reserves requirement that increased with a banks leverage plus a liquidity-reinsurance regime plus a resolution regime for bankrupt banks plus constraints on how the central bank is free to pursue its mandate.