Essays on the Political Economy of Central Banking

Nicholas K. Cooper

Advisor: Lawrence H White, PhD, Department of Economics

Committee Members: Peter J. Boettke, Christopher J. Coyne

Johnson Center, #326B
July 06, 2023, 02:00 PM to 04:00 PM


This three-chapter dissertation analyzes the political economy of central banking by examining the Bank of Amsterdam and the Federal Reserve’s Municipal Liquidity Facility as two separate case studies.

The first chapter, titled “Full Reserves, Fractional Practices, and Public Subsidies: The Case of the Bank of Amsterdam,” examines the political economy of the Bank of Amsterdam as a historical case study of a full reserve bank operating in practice. Many economists cite the Bank of Amsterdam as a proof-of-concept example of the feasibility of a full reserve banking system that is grounded on laissez faire principles. However, closer examination of the Bank’s full history finds that the Bank did not live up to its reputation as a full reserve bank, nor did the Bank’s regulatory environment conform with laissez faire banking principles. Even with the assistance of subsidies and privileges from the city of Amsterdam, the Bank of Amsterdam failed to maintain its full reserve requirement. Therefore, economists who advocate for full reserve banking on laissez faire grounds should reconsider using it as a prime example of their ideal system.

The second and third chapters examine the Federal Reserve’s Municipal Liquidity Facility as a case study of the entangled political economy between subnational governments and a nation’s central bank. The Municipal Liquidity Facility was instituted during the COVID-19 pandemic to support the municipal bond market and to provide liquidity for states, municipalities, and other governmental entities in the United States. Many of these subnational entities, having issued large amounts of pre-pandemic outstanding public debt, were already in strained fiscal condition prior to the pandemic. The second chapter, titled, “The Municipal Liquidity Facility and the Tragedy of the Monetary Commons,” examines how this subsidized lending facility creates a common-pool resource that distributes economic rents to politically connected subnational governmental entities via the Federal Reserve. It incentivizes these entities to entangle themselves with the federal government and the Federal Reserve for ongoing subsidies.

The third and final chapter, titled “Moral Hazard, Interjurisdictional Competition, and the Municipal Liquidity Facility,” examines how this lending facility creates a moral hazard that enables heavily indebted states and municipalities to continue running unsustainable budgets to fund non-pandemic-related fiscal needs. It also undermines competitive federalism in the United States by bailing out profligate state and local governmental entities at the expense of more soundly run states and localities.