Insuring rents

Economists have long recognized the need for durability-enhancing mechanisms to facilitate political exchange, but the focus has been almost entirely on mechanisms that raise the cost of reneging on bargains once they have been struck. What happens if these mechanisms fail? This paper argues that politicians have an incentive to establish an insurance-like mechanism that indemnifies interest groups whose legislatively-created benefits have been reduced. I consider the role of the Department of Justice’s settlement authority in facilitating this type of transfer, and illustrate my argument by examining two recent settlements involving Citigroup and Bank of America. These settlements are notable not only because they involved the allocation of money to third-party groups who were not directly harmed by the alleged violations of federal law, but because both corporations were required to donate millions of dollars to housing counseling organizations whose subsidies Congress reduced following the 2010 midterm elections.Mercatus CenterInstitute for Humane Studie

Monetary rules without romance

How much independence should the monetary authority retain in a rules-based regime? The conventional wisdom holds that while the political system - particularly in a democratic society - should determine the overarching goal of monetary policy, the central bank should remain free to select whichever "levers" it deems most appropriate for achieving the goal. This paper evaluates whether instrument independence is consistent with the goals of a rules-based regime by examining the monetary and macroeconomic effects of allowing the monetary authority discretion over the choice of control procedures when its objectives are at odds with the public interest. I argue that while a benevolent monetary authority would always select the most "efficient" policy instrument, i.e., the instrument consistent with achieving its stated objective, an opportunistic one may intentionally choose instruments that obscure its objectives, thereby undermining the purpose of monetary rules.Mercatus CenterInstitute for Humane Studie