Central Banks as Economic Institutions

Central Banks as Economic Institutions

The Cournot Centre series

Edited by Jean-Philippe Touffut

The number of central banks in the world is approaching 180, a tenfold increase since the beginning of the twentieth century. What lies behind the spread of this economic institution? What underlying process has brought central banks to hold such a key role in economic life today? This book examines from a transatlantic perspective how the central bank has become the bank of banks. Thirteen distinguished economists and central bankers have been brought together to evaluate how central banks work, arrive at their policies, choose their instruments and gauge their success in managing economies, both in times of crisis and periods of growth.

Chapter 9: Round Table Discussion: Monetary Policy in the New International Environment

Patrick Artus, Alan S. Blinder, Willem Buiter, Robert M. Solow and Otmar Issing

Subjects: economics and finance, money and banking

Extract

Patrick Artus, Alan S. Blinder, Willem Buiter, Otmar Issing and Robert M. Solow INTRODUCTION The round table discussion brought together four speakers, Patrick Artus, Alan Blinder, Willem Buiter and Otmar Issing, under the chairmanship of Robert Solow, and covered a variety of topics to do with central banking. Rather than present a direct transcription, we have grouped together the different speakers’ contributions into four broad themes, starting with the objectives of central banks and the tools at their disposal, moving on to explore the implications and effects of globalization on monetary policy and the problem of communication and transparency, and ending with the question of independence and accountability. CENTRAL BANK OBJECTIVES AND TOOLS Willem Buiter (London School of Economics) Economic first principles do not get us very far: the New Keynesian school, for example, tried to derive price stability as an objective – or even the overriding objective – of the central bank from first principles, but failed. All that can be obtained from first principles is a complex combination of three pillars: ● ● ● the Bailey–Friedman optimal quantity of money (OQM) rule (which is actually not an OQM rule, but only an interest rate rule) – setting the opportunity cost of holding central bank money equal to zero; the accommodation of ‘core inflation’ – avoiding relative price distortions between constrained and unconstrained price setters; the minimization of the deviation of output from the efficient level (not necessarily from capacity level, that is to say, not the output gap). 177 178...

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