The Money Minders: The Parables, Trade-offs and Lags of Central Banking

231 Pages·2022·2.761 MB·English

by  Jagjit Chadha

The Money Minders
Inthecrisesofthepastfifteenyears,centralbankershavebecomebig
public players in dramas that affect all our lives, including financial
market crashes, public health threats and devastating economic
downturns. Having played a lead role in the global financial crisis
and the coronavirus pandemic, they are now being asked to broaden
their portfolio of responsibilities. But their fundamental aim has
alwaysbeenoneofsimplyensuringmonetaryandfinancialstability.
In this book, Jagjit S. Chadha opens up the world of central banking,
explaining in accessible language the analytical techniques, policy
toolkits and simple storytelling central bankers use to understand
the economy, implement monetary policy and communicate their
decisionstokeydecisionmakersandthewiderpublic.
 .  is Director of the National Institute of Economic
and Social Research (NIESR). Previously, he was Professor of
EconomicsattheUniversityofKent, attheUniversity of Cambridge,
and at the University of St Andrews. He has worked at the Bank of
EnglandonMonetaryPolicy,asChiefQuantitativeEconomistatBNP
Paribas,andservedastheMercers’MemorialProfessorofCommerceat
GreshamCollegefrom2014to2018.In2021,hewasawardedanOBE
forhisservicestoEconomicsandEconomicPolicy.

The Money Minders
The Parables, Trade-Offs and Lags
of Central Banking
  
.
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www.cambridge.org
Informationonthistitle:www.cambridge.org/9781108838610
DOI:10.1017/9781108975414
©JagjitS.Chadha2022
Thispublicationisincopyright.Subjecttostatutoryexception
andtotheprovisionsofrelevantcollectivelicensingagreements,
noreproductionofanypartmaytakeplacewithoutthewritten
permissionofCambridgeUniversityPress.
Firstpublished2022
AcataloguerecordforthispublicationisavailablefromtheBritishLibrary.
LibraryofCongressCataloging-in-PublicationData
Names:Chadha,Jagjit,author.
Title:Themoneyminders:theparables,trade–offsandlagsofcentralbanking/JagjitChadha,
NationalInstituteforEconomicandSocialResearch.
Description:Cambridge,UnitedKingdom;NewYork,NY:CambridgeUniversityPress,2022.
|Includesbibliographicalreferencesandindex.
Identifiers:LCCN2021026887(print)|LCCN2021026888(ebook)|ISBN9781108838610
(hardback)|ISBN9781108971812(paperback)|ISBN9781108975414(epub)
Subjects:LCSH:Banksandbanking,Central.|Monetarypolicy.|Economicpolicy.|BISAC:
BUSINESS&ECONOMICS/Economics/Macroeconomics
Classification:LCCHG1811.C47752022(print)|LCCHG1811(ebook)|DDC332.1/1–dc23
LCrecordavailableathttps://lccn.loc.gov/2021026887
LCebookrecordavailableathttps://lccn.loc.gov/2021026888
ISBN978-1-108-83861-0Hardback
ISBN978-1-108-97181-2Paperback
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Contents
ListofFigures pagevi
Preface ix
Acknowledgements xi
1 Of Goldand Paper Money 1
2 The Great Depression and Its Legacy 29
3 Fine-Tuning Outof Control 51
4 AScience of Monetary Policy 79
5 Where the Great Experiment WentWrong 104
6 The New Art of Central Banking 137
Epilogue 171
Epilogue 1:Why Forecast? 173
Epilogue 2:Monetary Policy in Troubled Times 186
AFinalWord 199
References 201
Index 210
v
Figures
1.1 AnnualchronologyofBritishbusinesscycles,
1700–2010 page4
1.2 UKpriceinflationoverthelongrun 5
1.3 Ten-yearrollinginflationandBankRate 6
1.4 Goldpricerelativetoothergoodsandservices 8
1.5 Narrowmoneytoincomeratio 9
2.1 TheinterwarUKeconomy 35
2.2 Themultipliermechanism 42
2.3 IS-LManalysisR=InterestRate,Y=Output 45
2.4 Outputandinterestrates,1919–1939 47
2.5 DecomposingoutputandBankRate,1919–1939 48
3.1 FromPhillips’paperinEconomica(1958) 55
3.2 Thepolicyproblemwithtrade-off 56
3.3 ExpectationsshiftingthePhillipscurve 58
3.4 Countinginstrumentsandobjectives 66
3.5 Theeconomyasaconstraint 67
3.6 Poole’sproblem:Fixingmoneyorinterestrates 69
3.7 Thegradualistapproachtomonetarypolicy 75
4.1 UKinflationandgrowth 84
4.2 MeasuringmiseryintheUnitedKingdom 86
4.3 Inflationandgrowthoutcomes 87
4.4 TheLucascritiqueandthepenaltyshoot-out 90
4.5 GermanM3growthrelativetotarget 97
4.6 SettingNewKeynesianpolicy 100
5.1 Longhorizoninflationexpectationsoverthelong
expansionandbeyond 106
5.2 Long-termnominalinterestratepre-andpost-
independence 112
5.3 CPIinflationdecomposed 113
vi
   vii
5.4 TheMetzlerdiagram 115
5.5 Transfersfromyoungtooldunderhouse
priceappreciations 119
5.6 Whyaninflationundershootcanmakesense 126
6.1 BankRateandlong-termrates,1727–2020 139
6.2 PolicyratesandnominalGDPgrowth 142
6.3 Bondpricesandnetsupply 145
6.4 TheMPC1999viewoftheMTM 149
6.5 TheexternalfinancepremiumandMPIs 152
6.6 Asymmetriclosses 159
6.7 MPIsandthepolicytrade-off 161
6.8 Monetaryandfinancialco-operation 166

Preface
Somewhereinthecentreofaspacethatcontainseconomics,history
andpoliticsliesaneedforthestatetocontrolthevalueofmoney.The
competenceofthegovernmentanditscentralbankatthis
intersectionseemstosignalsomethingquiteimportantaboutthe
overallcapacityofastatetodealwithitscollectiveproblems.The
signalofafailedstateseemstobecloselytiedupwiththecollapsein
confidenceinitsmonetaryandfinancialsystem;somuchsothat
someconsidersoundmoneytobetheultimatepublicgood–supplied
bythestatebutofusetoallprivateagentsintheirongoingattemptto
makeplansforafuturehamperedbymuchriskanduncertainty.This
isasmuchtrueintheyearoflockdownandCOVID-19asitwas
duringthefinancialcrisissomedozenyearsago,aswellasthe
plethoraoffluctuationsineconomicactivitythatcentralbanksare
calledupontojudgetheappropriatepolicyresponse.
Dullasitseemstomost,moneyhasfascinatedmesince,asa
child,Itriedtounderstandthemovetodecimalcoinagefromold
shillingsandpenceandlookedatthepamphletsandinformation
filmsthatexplainedthechange.AsIrecall,theoldcoinslookedalot
moreinterestingwithflorinsandcrownsmintedinancientyears
beatingnewpencehandsdown.ButreallyIcouldnotunderstandwhy
itmatteredsomuchandtriedtoexplaintoanaudienceofkind,but
probablyverybored,schoolparentshowcurrencywasjustanother
wayofcounting,inordertowinanEnglishSpeakingBoardcertificate.
MrsKeeley,ourelderlyneighbourwhosesupplyofhumbugsnever
seemedtorunout,didunderstandbetter:thesewerethecoins
associatedwithGreatBritain,andthesenewvaluelesscoinswerepart
ofacountrywhosepositionwassimilarlydepreciated.Ididnot,of
course,begintounderstandwhatshemeant.Inthisintroductionto
monetarypolicymakingIammostlymotivatedbythetechnical
ix