Selected Essays of Axel Leijonhufvud
Economists of the Twentieth Century series
Chapter 9: Constitutional constraints on the monetary powers of government
In a memorable Peanuts cartoon of quite some years ago, Peppermint Patty was shown in school struggling with a true/false examination. Her efforts to divine the malicious intent of capricious authority went something like this. ‘Let’s see, last time he had the ﬁrst one False. So this time it should be True.’ ‘He wouldn’t have just one False, after a single True. So: False, False.’ ‘OK, now we’ve got True, False, False, True … ’ ‘Looks reasonable so far’, she says with a contented smile. If this sounds vaguely familiar, it may be because you read the business and ﬁnancial pages. ‘This quarter should be GO, because they want interest rates down before the election.’ ‘Next quarter will be STOP again, though, because otherwise we risk a revival of inﬂationary psychology.’ ‘Quarter after that is probably STOP too, but then it is bound to be GO because something will have to be done about unemployment.’ ‘So, now we’ve got GO, STOP, STOP, GO … Looks reasonable so far.’ But not much farther. It is possible sometimes to muster considerable conﬁdence in Peppermint Patty divination for the ﬁrst few steps into the future. But a few more steps and it falters and then disappears altogether. You cannot build up a ﬁrm expectation of the price level in 1985 in this way. Your price-level expectations for 1990 or 1995 will be so diffuse that, if possible, you would rather not write contracts the real outcome of which will depend signiﬁcantly on...
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