Central Banking in Theory and Practice

Central Banking in Theory and Practice

Central Banking in Theory and Practice

Central Banking in Theory and Practice

Synopsis

Alan S. Blinder offers the dual perspective of a leading academic macroeconomist who served a stint as Vice-Chairman of the Federal Reserve Board--one who practiced what he had long preached and then returned to academia to write about it. He tells central bankers how they might better incorporate academic knowledge and thinking into the conduct of monetary policy, and he tells scholars how they might reorient their research to be more attuned to reality and thus more useful to central bankers. Based on the 1996 Lionel Robbins Lectures, this readable book deals succinctly, in a nontechnical manner, with a wide variety of issues in monetary policy. The book also includes the author's suggested solution to an age-old problem in monetary theory: what it means for monetary policy to be "neutral."

Excerpt

Central banks have never been more powerful than now. Monetary policy has become the central tool of macroeconomic stabilization, and in more and more countries monetary policy is in the hands of an independent central bank.

So how central banks operate really matters. To discuss this, there is no one better than Alan Blinder of Princeton University, who combines academic eminence with previous practical experience as Vice-Chairman of the Board of Governors of the Federal Reserve Board.

In these Lionel Robbins Memorial Lectures he argues powerfully that central banking can only be conducted effectively within a proper intellectual framework. This must be based on dynamic optimization, where each year we select a plan for now and for the future that will produce the best available time-path for output and inflation. This does not mean that policy becomes inflexible because the whole trick is to remake the plan each year. But unless we choose today's policy as part of a longer-term strategy, we shall tend to continue too long with a policy that is either too tight or too loose.

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