Effective Central Banking

Marvin Goodfriend, Professor, Tepper Business School at Carnegie Mellon University, gave a wonderful speech at RBI recently on Central Banking.

He is another inflation hawk and supports inflation targeting framework. The speech is full of examples on why inflation is important and how monetary policy help in lowering the same.

He looks in particular at the Volcker era and how Volcker managed to lower inflation in the US economy despite odds heavily against hiom. He explainns, earlier on the Fed struggled to rein in inflation and preferred to lower unemployment instead and let inflation rise. As a result inflation expectations were always high and inflation could never be lowered. Volcker changed all that.

He mentions about the importance of independence of central banks and makes a very vital point

Central bank independence in support of a commitment to price stability is rightly regarded as an essential element of effective monetary policy. Yet neither central bank independence nor the commitment to consistent price stability can be secure unless the Treasury’s power over exchange rate policy is clearly subordinated to the nation’s commitment to price stability.

He suggests price stability in form of an explicit target helps both the Central Bank and the public. If the commitment to price stability is just implicit, the public may not be able to understand the actions.

Suman Bery in BS shares his thoughts over Goodfriend speech.

One Response to “Effective Central Banking”

  1. How the World Achieved Consensus on Monetary Policy « Mostly Economics Says:

    […] How the World Achieved Consensus on Monetary Policy This is a superb paper (by the same title) from Marvin Goodfriend. He gave a similar kind of speech at RBI this year at October which I covered here. […]

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