The Cato Institute Published a new paper on reforming our financial system. Here are their recommendations on fiscal policy:

Narrow the Fed’s statutory mandate. Congress should replace the Fed’s dual mandate with a single stable spending mandate. The mandate requires the Fed to maintain a stable, if steadily increasing, level of aggregate spending on goods and services, or in other words, a stable dollar value of national income. Congress should also repeal the financial stability mandate given to the Fed in Title I of the Dodd-Frank Act.

The Fed has to follow a policy rule. Congress requires the Fed to implement a simple rule that Congress can easily monitor and use to hold the Fed accountable. The rule requires the Fed to commit to maintaining a fixed growth rate for nominal gross domestic product (NGDP), a popular measure of total spending. The exact rate, as well as other details, may be left up to Fed officials to decide, but most experts place the desired growth rate of NGDP somewhere between 3-5 percent.

Shrink the Fed’s balance sheet and reinstate a “scarce” reserve regime. In a scarce reserve regime, instead of holding sufficient reserve balances, banks will economize on reserves. To meet temporary reserve shortfalls, banks must turn to either the private repo market or the Fed’s standing repo facility. To ensure that the Fed returns to a scarce reserve system, Congress should insist that the Fed follow the Financial Services Regulatory Relief Act of 2006, a law that stipulates that the interest rates the Fed pays on reserve balances exceed “normal levels.” should not Short-term interest rates.”

These are largely my opinions, although I prefer to leave Congress’s monetary policy mandate as is and let the Fed decide how best to fulfill that mandate. Let a different organization handle financial stability.

But Cato’s specific monetary policy proposals are sound, and would dramatically improve policy. What I would add is that the NGDP target must be a level target, to reduce the risk of policy making choosing to undershoot the NGDP seen in 2008-09 or overshoot as seen in 2021-22. The biggest problem with current monetary policy is the lack of level targeting.

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