Monetary policy is still one of the most contested areas of modern economics, and since the original publication of Policy Makers on Policy much has changed. This new edition collects contributions from leading policy makers and practitioners to reflect on the aims and objectives of monetary policy and on what it can achieve, combining the old chapters from Gordon Brown, Tony Blair, Kenneth Clarke, Geoffrey Howe, Nigel Lawson, and others, with new perspectives from Mervyn King, Jean-Claude Trichet, Ernst Welteke, Otmar Issing, and Alastair Darling.
A new far-reaching introduction from the editors Forrest Capie and Geoffrey Wood puts these important contributions to the discussion of economic policy in the new context. They look at what lessons can be learnt from the earlier discussions, what anticipations of present difficulties can be found in them and what, in other words, the comparatively recent past teaches us about how to deal with the turbulent present. The second edition of Policy Makers on Policy brings together otherwise inaccessible commentaries and reflections on policy by those involved in making it, along with a commentary on and context for their remarks.
Thus the book will be of great interest and use to students of economics and politics, and indeed anyone with an interest in current economic developments and their roots in the past. Forrest H. Geoffrey E. See All Customer Reviews. Shop Books. Add to Wishlist. USD Overview Monetary policy is still one of the most contested areas of modern economics, and since the original publication of Policy Makers on Policy much has changed.
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Pages: Product dimensions: 6. About the Author Forrest H. Table of Contents 1. Show More. Average Review. Write a Review. Related Searches. Capitalist Diversity and Diversity within Capitalism. So far various interpretative hypotheses were advanced to explain the genesis of the political process that leads a monetary regime to assume given characteristics. Developments in endogenizing the central bank governance and thereby its effectiveness has been the subject of analysis in both economics and political science.
All the hypotheses stress the importance of studying the role of the preferences of both the citizens and the governments in determining the central bank governance features. Furthermore, it is worth noting that the different views can be intertwined in studying under which economic, institutional and cultural conditions reforms of the central bank governance do take place or not.
It is also evident that these studies acquire greater importance in periods — as the present period after the Financial Crisis — when there is a tendency to reform, or at least to question, the design of the central bank governance. During the s and s, central banks were very much shrouded in monetary mystique and secrecy Goodfriend, The theoretical rationale for the lack of central bank transparency and communication was given by the theory of ambiguity, credibility and inflation under discretion and asymmetric information developed in the seminal article of Cukierman and Meltzer Transparency of central bank decision-making has increased rapidly from the early s beginning with the adoption of inflation targeting by the Bank of England, Bank of Canada, Reserve Bank of New Zealand and the Swedish Riksbank.
Although the Federal Reserve System was officially not conducting inflation targeting, in practice it gradually shifted more or less as to inflation targeting. The European Central Bank adopted from its beginning a so-called two-pillar strategy with a monetary pillar focusing on monetary aggregates like M3, which it inherited from the Deutsche Bundesbank, and an economic pillar taking account of the drivers of inflationary expectations. Nowadays, most central banks put a much larger weight on their communication with the public nowadays than they used to do.
An important trigger for increased transparency has been the requirement for greater accountability of independent central banks. As central banks have become more independent over time, they have to pay closer attention to explaining what they do and what underlies their decisions Briault, Haldane and King, More transparency and increased use of communication is partly a logical consequence of this development. Even though central bank accountability justifies this trend towards more transparency, it is less obvious that more central bank transparency is also beneficial from an economic point of view.
Therefore, many theoretical studies try to analyse whether the trend towards transparency could be justified from an economic point of view as well. These studies vary not only with respect to the different aspects of central bank transparency, such as political, economic, procedural, policy and operational transparency, but also regarding the structure of the economy determining the monetary transmission mechanism Issing, Besides this theoretical research on the economic effects of more central bank transparency, more recently empirical studies also address various questions using recently developed indices of central bank transparency.
The objective of this introduction is not to give a comprehensive overview of the literature on the economic effects of more central bank transparency. The transparency literature can be distinguished within five different categories: political, economic, procedural, policy, and operational transparency. Building on these five categories, the first comprehensive index for central bank transparency was constructed for the central banks of Australia, Canada, Eurozone, Japan, New Zealand, Sweden, Switzerland, the United Kingdom and the United States Eijffinger and Geraats, Nowadays the ability of central banks to affect the economy critically depends upon their ability to influence market expectations regarding the future path of overnight interest rates, and not merely their current level.
Therefore, the public understanding of current and future policy is critical for the effectiveness of policy. In other words, monetary policy is increasingly becoming the art of managing expectations. Virtually all central banks in advanced economies have taken major steps in using communication as a key instrument in monetary policy-making.
For example, many central banks, including the Bank of England and the Federal Reserve System, publish minutes and voting records, while the European Central Bank explains its monetary policy decisions at the day of the meeting of its decision-making body at a press conference. The increased importance of communication for policy makers is mirrored by the rapid development of the academic literature on this topic. Researchers have highlighted two reasons why communication may prove useful for central banks.
First and foremost, communication may be a very direct and effective tool to influence expectations. Second, communication may be used to reduce noise in financial markets. More transparency over policy may lead to greater predictability of central bank actions, which, in turn, reduces the uncertainty in financial markets. The ability of policy makers to move asset prices and the predictability of policy decisions are not independent of each other as communication that leads to high predictability of decisions may also have a significant effect on financial markets.
However, it is by no means clear what constitutes an optimal communication strategy, as it is not straightforward that providing more information is always preferable. Any communication strategy of a central bank is faced with a potential conflict as the literature on transparency has shown that a maximum level of information need not be optimal for the efficiency with which it is able to pursue its mandate.
Indeed, from a theoretical perspective it is not obvious that communication may help the central bank realizing its ultimate objective s , like price stability and stable economic growth. Communication has little value added if the central bank credibly commits to a policy rule. One might say that a central bank can be fully transparent without any communication. This stylized example makes clear that there are, essentially, three reasons why central bank transparency and communication may matter: non-rational expectations, asymmetric information, and absence of policy rules and credibility.
If one or more of these conditions hold, central bank communication may have an impact on financial markets see also: De Haan, Eijffinger and Rybinski, First, the assumption that the public will understand monetary policy perfectly regardless of the efforts that are made to explain it may be unrealistic. In other words, by communicating to the public the central bank may help anchoring expectations. Bernanke refers to the recent literature on adaptive learning in explaining why communication on these issues affects monetary policy effectiveness.
The feedback effect of learning on the economy can lead to unstable or indeterminate outcomes. In such a setting, communication by the central bank may play a key role in helping improve economic performance. If there is asymmetric information, i. The central bank may, for instance, provide information about its reaction function. One possibility in countries without explicit inflation targets is that central bank may provide information about the long-run inflation target of the central bank.
Likewise, central banks could also provide information on the relative weights that the central bank places on its output and inflation objectives. Furthermore, the central bank may have better information on the economic outlook. Kohn and Sack argue that private agents may lend special credence to the economic pronouncements of central bank, particularly if the central bank has established credibility as an effective forecaster of the economy. However, even if the central bank has private information an important issue that remains to be settled is under which circumstances release of this information may be beneficial, i.
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Finally, most central banks do not follow a fixed rule. The problem is that the number of contingencies to which policy might respond is effectively infinite and, indeed, many are unforeseeable. At the end of our story monetary policy and central banking become two sides of the same coin: the modern central banker was essentially a monetary policy agent, primarily focused on monetary stability goals, which can be pursued by maneuvering interest rates. The mainstream of modern central banking can be briefly summarized using the principal-agent terminology.
The citizens, who represent the principal, realized that on average the politicians in charge tend to use monetary policy tools to obtain short term macroeconomic goals. Therefore, politicians tend to use monetization to address urgent problems in terms of unemployment, fiscal unbalances, and recently banking bail-outs. But the more the markets are rational and efficient, the more it is likely that monetization policies simply produce more inflation and uncertainty, without any real gains.
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Consequently for monetary policy effectiveness, it is crucial that the mission of the central bank is well defined and established using three criteria. First of all, the main goal of the central bank has to provide monetary stability in order to avoid the employment bias, i. Secondly, the central bank cannot finance public deficits and debt in order to avoid the fiscal bias, i. Thirdly and more recently, central bank involvement in financial regulation and supervision has to be minimized in order to avoid the banking bias, i.
Furthermore, the mission of the central bank has to be protected from risks of political capture, defining its independence from executive power, its accountability with respect to legislative power, as well as procedures for its transparency and policies for communication. The relevance of the central bank governance has been definitely settled in the last decades. However, the optimal central bank governance has still not been established fully according to our perspective. The governance of central banks has become the benchmark to evaluate the effectiveness of the monetary institutions, supported by empirical analyses which stressed the association between central bank independence and inflation performance.
That was the situation before the Financial Crisis. But now, after the Financial Crisis, the scenario is changing. The desire to avoid new cases of systemic banking instability and at the same time to address the deep economic crisis has focused new attention on the architecture of the central bank regimes. Policymakers in all countries have wondered and are still wondering whether to reshape their central bank settings.
New proposals to reform these systems have been enacted or are under discussion, at least in Europe and in the United States. In both cases the common trend seems to be an increasing involvement of the central banks in financial regulation and supervision, also taking into account the new distinction between macro and micro prudential supervision. It is evident that the central banking pillars of the monetary action must be reconsidered. But how should that been done? Is it possible to maintain the benefits of the mainstream of central banking maintaining monetary stability and also taking into account at the same time the importance of financial stability?
Consequently, is it possible to reintroduce banking responsibilities into the central bank domain in a way consistent with the present institutional setting, i. On these questions our final overall suggestion is that reconsidering the central banking benchmark implies a relevant risk assumption, which so far has been underestimated.
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We hope that the readers of this note will find guidance in the selected articles — which we collected in Eijffinger and Masciandaro — which we consider to be classical and essential reading for understanding these problems.