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What is an Economic Constitution?

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  • Written By: Osmand Vitez
  • Edited By: C. Wilborn
  • Last Modified Date: 24 September 2016
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An economic constitution is a declaration of policies and guidelines formed by a government to control a nation's economy. This constitution can be a historical or recent document as the government changes its economic policies. Creating an economic constitution allows the country to have a baseline for governing its economy through changes in currency, international business, and other factors. The creation of a central bank or federal reserve is often a part of the constitution. This governing body will consult on or make decisions relating to certain factors within the economy, such as money supply and interest rates.

Western countries and those with a democratic background typically have an economic constitution. The freedom of choice by those directly living under the constitution is necessary as economic transactions affect all individuals. A popular vote may also be necessary in certain countries for creating or making changes to the constitution.

International countries may also join together on parts of an economic constitution to create a stronger and more vibrant economy. This can result in a universal currency and potentially freer trade between the countries. The ability to work with other countries economically will also improve due to the combined resources.

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Monetary policy is typically the main focus for an economic constitution. This policy focuses on price stability through interest rates and inflation control. Power given under the constitution typically allows the governing economic body to make polices that expand or contract the economy.

The central bank or federal reserve will use the money supply as its main tool to keep prices stable. Inflation is often the culprit to rising consumer prices. Historically, too many dollars chasing too few goods is the normal definition of inflation. Although inflation can — and often does — occur naturally in the economy, out of control monetary policies can also be a major contributor. The control of money supply and interest rates can help a country tame this problem in their economy.

An economic constitution can also help a country become more stable and increase economic involvement with other countries. Having an unstable economic environment typically reduces the amount of external investment from other countries. A stable economy led by a stated constitution allows the country to portray itself as ready for external investment. The constitution can also rid other government agencies or department of individuals attempting to control the economy for personal gain. Removing as much corruption as possible often helps improve the economy and maintain overall economic stability.

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