	Introduction

The Constitution grants Congress the power to "coin money, and regulate the value thereof...." Congress has delegated responsibility for making U.S. monetary policy to the Federal Reserve System (Fed). Quasi-public in structure, overseen by a Board of Governors whose members are appointed to long terms, and reliant on its own source of funding, the Fed possesses a degree of independence that some argue is inimical to the spirit of democracy. Although this argument (and refutations of it) may be political or constitutional in nature, it is also rooted in certain notions about macroeconomic policy. While the ability of fiscal policy to raise or lower inflation is only temporary, monetary policy can only raise or lower (inflation-adjusted) interest rates temporarily. In the long run, monetary and fiscal policy have very different influences, however. Monetary policy determines the inflation rate, fiscal policy does not. Experience teaches that this is not the case. The short-run effects of monetary policy differ substantially from its long-run effects. In the long run the Fed does not control real interest rates, and efforts aimed at controlling interest rates based on its short-run influence generally result in accelerating inflation or deflation. Independence

Whereas fiscal policy is made jointly by the legislative and executive branches, monetary policy is influenced only indirectly by either. It would also tend to produce more business cycles if policy directed at reducing inflation is aborted before it is complete, only to be reintroduced again later when the renewed expansion makes inflation worse. But the economics of monetary policy is such that the cost of making the Fed more responsive to short-term public opinion would likely be an increased tendency to inflate the economy and to reverse anti-inflation policies before they have time to achieve their intended purpose. In the short run, the responsiveness of inflation to changes in monetary policy depends in part on people's expectations of the Fed's behavior. The latter would tilt economic power significantly toward the executive. It is entirely possible for monetary policy to be undoing what fiscal policy is doing with output and employment, or for monetary policy to be reinforcing the effect that fiscal policy is having on interest rates. Directed in concert, the two policies should be able to produce much more effective policy than if they are determined in isolation of each other. In particular, using fiscal and monetary policy in concert allows aggregate demand to be influenced with minimal disruption to interest rates and the exchange rate, since fiscal policy pushes interest rates and the exchange rate in the opposite direction of monetary policy. Hence, good policy can be much better if monetary and fiscal policy are coordinated, but bad policy can be made much worse. Opting for more or less coordination therefore boils down to a trade-off between maximizing the benefits that come from policy when it is well-chosen and minimizing the costs that occur when policy is ill-advised. Democracy—in this case, the potential shifting of the powers of the Fed to elected officials—is one approach to increasing accountability, but it is not the only one. It might produce better policy.
The Federal Reserve System (Fed) is charged with responsibility for making U.S. monetary policy. Quasi-public in structure, overseen by a Board of Governors whose members are appointed to serve long terms, and reliant on its own source of funding, the Fed possesses a degree of independence that some argue is inimical to the spirit of democracy. Although this argument (and refutations of it) may be political or constitutional in nature, it is also rooted in certain notions about macroeconomic policy.
The power that the Fed wields is substantial. Along with fiscal policy, monetary policy is one of two kinds of policy that can be employed to influence aggregate demand. In the short run, both monetary and fiscal policy have the power to raise or lower employment. But they have opposite short-run effects on interest rates (expansionary monetary policy lowers interest rates and expansionary fiscal policy raises them), so that in concert they can achieve results that neither can in isolation. The long-run effects of the two policies are quite different from their short-run effects. Fiscal policy helps determine interest rates in the long run, but not the rate of inflation. Monetary policy largely determines the inflation rate, but cannot be used to fix interest rates in the long run. Policies based on the assumption that monetary policy can fix interest rates ultimately generate accelerating inflation or deflation.
Monetary policy affects inflation only after it affects employment. A policy structure that responds quickly to the immediate concerns of the public is thus more likely to generate inflation than one that allows policymakers to more easily weather bad times. A very responsive policy structure not only increases the likelihood of high inflation. It also tends to produce more business cycles if policy directed at reducing inflation is aborted before it is complete, only to be reintroduced again later when the renewed expansion makes inflation worse. On-again, off-again policies erode the credibility of the monetary authorities and make anti-inflation policy all the more costly and lengthy when it is undertaken in earnest.
Reducing the independence of the Fed either means reducing the ability to engage in discretionary policy or shifting economic power to the executive branch. This is an important consideration given the difficulty in calibrating policy. Because the legislative branch is not in a position to exercise day-to-day control of monetary policy, if it wishes to reduce the Fed's discretionary powers, it must choose between establishing policy rules to which the Fed must adhere or allowing the executive to administer policy. Economists who oppose rules fear that they would be too rigid to deliver economic stability in a highly complex economy.
Better coordination of monetary and fiscal policy is a double-edged sword. If "good" policy is pursued, it will be all that much better if simultaneously pursued with both tools. But if "bad" policy is pursued, using both tools to pursue it will make the result that much worse. Thus, the choice boils down to whether the policy structure should be one that maximizes the benefits that come from policy when it is well chosen or minimizing the costs that occur when policy is ill-advised. This report does not track legislation and will be update as events warrant.