Sunday, December 07, 2008

A Brief History of Central Banks by Michael D. Bordo

Michael D. Bordo, one of the world’s foremost economic historians, provided the Federal Reserve Bank of Cleveland "A Brief History of Central Banks." In it, he describes the forces leading to the evolution of central banking and draws lessons for us now.

What do you think of his recommendation that central banks rather than targeting a positive inflation rate, should target the price level (i.e., zero inflation)?


Nathan Read said...

If the goal of central banks is to keep inflation low than why not target a price level. If zero inflation keeps future price levels low as studies have shown than it is only reasonable for that to be the adopted principle of the central banks. Short-term risk of rapid deflation is the primary concern against adopting price levels. However studies have shown that over time price levels will naturally move toward the means of the zero interest rate thus alleviating much of that risk. Then price levels can bring long-term stability. Therefore the central banks should adopt the prinicple of price levels.

Kenneth Shockley said...

It's and interesting idea to target zero inflation, but only if the entire world were to set it as the target.

My reasoning behind that would be that a strong dollar would hurt our exports to other nations, which would happen due to our dollar staying the same and theirs weakening due to inflation.

There is also the risk of deflation, which would encourage saving money instead of spending it since a dollar tomorrow would be worth more than a dollar today. It is an interesting idea, but it sounds to me like he wants to go back to the era of the gold standard. That might not be a bad thing, but I don't think it's feasible.

Mike Shockley said...

I see this as a positive goal. By targeting a zero inflation, the exchange rate of the dollar would be protected. The run-up in commodity prices we've witnessed in the current administration was fueled by the weak dollar. Once the dollar rallied against other currencies, the commodity (oil, gold, grains) finally gave up their gains. By providing security of a zero inflation rate, commodity (and the dollar) would be protected.

Unfortunately, I believe preserving currency stability will be seen as something that curbs the economy and thus a challenge to adopt. Still, some form of the Bretton Woods monetary system would be beneficial to give incentives for companies to once again make capital expenditures and small business to take risks and create jobs.

The current financial stimulation has pumped trillions of dollars into the money supply. I've not seen an exit strategy for these dollars. It would be ironic if the financial stimuli to correct the challenges of the 2001 over stimulus ends up creating even more problems in another eight years.

Dr. Malcolm C. Harris, Sr. said...

It not only would be ironic but is ironic that Greenspan's war on deflation caused the current mess. The current worrying about deflation has me far more worried than the recesion even though it took a dramatic turn for the worse in the last few months.

Maybe we can not return to the historical gold standard. What may actually be feasible would be a commodity standard based on a basket of thirty to forty fungible commodities.