Why the Sound Dollar Act would produce unsound monetary policy

Coming out of their 2012 electoral debacle, Republicans hit the ground running in 2013 with two big ideas, balanced budgets and adamantium-hard money. I’ve blogged against balancing the budget in ten years and a balanced budget amendment.

Now let me take a crack at The Sound Dollar Act of Rep. Kevin Brady, a Texas Republican. His proposal would give the Federal Reserve a single mandate: price stability. What’s more, he gives the mandate an unneeded Austrian flavor by having the Fed monitor asset prices as well as prices for goods and services. A Wall Street Journal op-ed today by Seth Lipsky touts the legislation.

Now, I am all for rules-based monetary policy and a single goal mandate. Unfortunately, Brady’s Sound Dollar Act would make for unsound, liquidationist monetary policy. It would risk a repeat of the Great Depression and Great Recession, two economic catastrophes where an overly tight Fed played a central role. (See: ECB and EU debt crisis.) In fact, my AEI event last Friday, “Mend it, don’t end it: Revamping the Fed for the 21st century” argues exactly against this sort of approach in favor of the Fed ensuring macroeconomic stability by targeting the level of nominal GDP. And here is a brief summary.


One thought on “Why the Sound Dollar Act would produce unsound monetary policy

  1. In my view this rule would send what is left of the US manufacturing sector farther into the red.In this global economy an overvalued currency is a death knell to a nations exporters.Why is it that each new treasury secretary must find it proper to claim they support a strong dollar.Foreign nations always say a strong dollar policy is best for the US economy.Of course they say that because it helps them export more goods to the US.I want a US treasury secretary to say ” a weaker dollar relative to other trading partners is in the best interest for our exporters and industrial base”.

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