Thursday, December 2, 2010

More on Central Banking

I've mentioned from time to time central banking, and that next term we'll look into what Central Banks are and what they do. There's much more fuss currently in the US about their central banking system, the Federal Reserve, than there is here. This article is a reasonably good description of both the system, and the problems it is facing.

There are a lot of issues covered in the article, but something I mentioned yesterday is of note: Since the 1970s the Fed has had a "dual mandate" - maintain not just low and stable prices but also maximum employment (whatever that means). This would seem to be at the bottom of many criticisms over there, since it gives an unelected body a large say in macroeconomic policy.

We'll find out next term that monetary policy and fiscal policy can often act against each other and frequently do. They act against each other in general macroeconomic terms: If the central bank is targetting output. In the UK we appear to try to limit this potential conflict by having the Bank of England only target keeping inflation at a particular level. This may lead to it considering output when it sets interest rates (since output affects inflation) but fundamentally the Bank is judged on whether it achieves 2%.

So it may be this extra macroeconomic goal the Fed is set in the US which attracts particular criticism. It could also just be that the Tea Partiers have stirred things up there, but certainly we don't appear to be criticising the Bank of England half as much here.

The other point of interest is whether unelected bodies should have power over economic policy. The first instinct is probably to shout "no!", but on the other hand populist policies are not necessarily the best policies. The populist policy of hounding banks out of town is self-defeating since then jobs are lost, and who is going to set-up business in an environment. Populist policies also often conflict with what you'll learn during econ101ab to be the best policy - so perhaps unelected bodies may do a better job?

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