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Central Banking, Monetary Theory and Practice

Essays in Honour of Charles Goodhart, Volume One

Edited by Paul Mizen

Celebrating the contribution that Charles Goodhart has made to monetary economics and policy, this unique compendium of original papers draws together a highly respected group of international academics, central bankers and financial market regulators covering a broad range of issues in modern monetary economics. Topics discussed include: central bank independence; credibility and transparency; the inflation forecast and the loss function; monetary policy experiences in the US and the UK; the implications of Goodhart’s Law; the benefits of single versus multiple currencies; and money, near monies and credit.
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Chapter 8: Goodhart's Law: its origins, meaning and implications for monetary policy

Alec Chrystal


8. Goodhart’s Law: its origins, meaning and implications for monetary policy Alec Chrystal and Paul Mizen1 1. INTRODUCTION Many distinguished economists have their name associated with some theory, concept or tool in economics. Obvious examples include: Giffen goods, the Pigou effect, Nash equilibrium, the Coase theorem, the Phillips curve, the Rybczynski and Stolper–Samuelson theorems, Ricardian equivalence, the Engle curve, the Edgeworth–Bowley box, Tobin’s q, and the Lucas critique. However, very few economists are honoured by having their name associated with a ‘law’. Charles Goodhart joins Sir Thomas Gresham, Leon Walras, and Jean-Baptiste Say in a very select club. In this chapter we explain Goodhart’s Law and the context in which it arose, and discuss whether it has the qualities that will help it survive over time. Mainly this requires that it can be adapted to new circumstances as the world changes. Gresham’s Law, for example, was invented to describe the problems that arose from the artificial fixing of gold and silver prices but it turned out to have applicability to a wider range of monetary regimes wherever currency substitution was possible. Dollarisation in Equador, and other countries, would be a contemporary example of ‘good money drives out bad’. We shall focus particularly closely on the comparison between Goodhart’s Law and the enormously influential Lucas Critique. It could be argued that Goodhart’s Law and the Lucas Critique are essentially the same thing. If they are, Robert Lucas almost certainly said it first. However, while both Goodhart’s Law...

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