Reimagining monetary policy as a federal project

Monetary policy suffers from a one size fits all problem.

Central banks typically determine monetary policy by setting a headline interest rate uniformly across their jurisdiction.

Yet, in large jurisdictions, the optimal monetary policy on average tends to be suboptimal for economically heterogeneous regions. Outside the realm of monetary policy, a solution to this type of governance problem is widely accepted: federalism. But the state of the art has not analyzed federalism as a paradigm of monetary governance.

This is curious especially because it is not uncommon for central banks to be structured institutionally according to federalist principles: split into a central headquarters and decentralized branches. Yet even then monetary policy is determined centrally and uniformly across central bank jurisdictions.

FEDMONEYs research hypothesis is that it is desirable to federalize monetary policy by taking advantage of federal central banking structures to modulate monetary policy differently across economically heterogeneous regions. Its central aim is to develop a systematic legal and economic analysis of monetary federalism, which we currently lack.

FEDMONEY seeks to verify its research hypothesis by writing the untold legal history of monetary federalism in the United States and Europe.

It will contextualize that history in light of constitutional theories of federalism in both jurisdictions, as well as the intellectual history of economic thought.

The project is groundbreaking in that it opens up new horizons for research in law, economics and beyond, and creates a powerful new tool for central banks to shape economic growth and development.

FEDMONEY is urgent because central banks rediscovered monetary federalism in their responses to the past decade of economic crisis, but lack a theoretical framework grounded in law and economics to assess its costs and benefits. Absent such a framework, interest in monetary federalism is likely to fade soon.