September 16, 2002
Alan Blinder, "The Quiet Revolution: Central Banking Goes Modern" Alan Blinder, The Quiet Revolution: Central Banking Goes Modern

Alan Blinders' Okun Lectures are three separate lectures dealing with three aspects of modern central banking. The first deals with *transparency*: with the extent to which central bankers make their thoughts and their policies known to three separate circles--financial markets, observers of monetary policy, and the broader public. The second deals with the committee structure of central-bank decision-making: is this committee structure a good thing? The third deals with whether central bankers should take care to follow financial markets--to do what financial markets expect them to do--or whether central banks should lead financial markets.

All three big lectures are extemely well-written, full of interesting and important insights, witty, and thus very readable. While I am still stuck on page 47 of Kenneth Cam's impenetrable _The Rules of the Game_, I found myself able to race through Alan Blinder's manuscript in less than a morning. So Yale University Press should definitely publish this manuscript.

I did, however, find that I wanted some revisions to the book. In chapter 2 Alan Blinder argues that central banks have become much more transparent in the past decade, and that this transparency is a good thing. But there is another literature, concerned with central bank independence, that Blinder does not mention in his lecture. This other literature has concluded that central bank independence is a very good thing too. And this raises the question of whether transparency tends to undermine independence. William Grieder, for example, believes that it does--that only the lack of transparency allowed the Federal Reserve to be independent enough to trigger the recession of 1980-1982 that was the Volcker disinflation. William Grieder thinks that the Volcker disinflation was a bad thing--and that transparency would have prevented it. Most economists think that the Volcker disinflation was a good thing. To the extent that they think that transparency is at odds with independence, they vote for independence. The implicit argument is that there is an arcana imperii of central banking that means that sometimes the central bank has to do things that are hard to explain to voters, and thus that the less public are its technocratic decision, the better.

I think that Alan Blinder needs to take this argument on head-on in chapter 2. I'm curious what his thoughts are on it. If he can square the circle and say that transparency does not threaten independence, well and good. If he wants to take up some alternative position, that would be fine as well.

In chapter 3 Blinder takes on the question of the committee structure of decision making. The argument for a committee is simple: three heads are better than one. Where one can often make mistakes, three--as long as there is a right answer out there if you look long enough--tend to check each other and neutralize each other's mistakes. The argument against a committee is also simple: committees tend to move slowly, at least some say, and so may find themselves falling behind the curve.

I found myself wanting revisions to this chapter as well, because central bank decision making (in the U.S. at least) is not made by an equal committee. Monetary policy is made by one dominant personality--Arthur Burns, Paul Volcker, Alan Greenspan--checked by the requirement that he induce the FOMC to assent (almost always unanimously assent) to his point of view. This seems to me to be neither a conventional committee nor a single decision maker, and I would like to hear Alan Blinder's thoughts about why we have wound up with this half-fish half-fowl process.

In chapter 4--but this is a matter of taste--I would have placed more stress on financial market irrationality. A financial market that cannot get the expectations theory of the term structure or uncovered interest parity right cannot be worth following. But it can be worth training--a patient central bank should try to train financial markets to understand and accurately forecast the policy rules of thumb it follows.

All in all, I was very happy to read this ms.



Sincerely yours,


J. Bradford DeLong Posted by DeLong at September 16, 2002 12:33 PM | Trackback

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