Barry Eichengreen the 61 year old American Professor of Economics and Political Science at the University of California, has published an article on Project Syndicate titled ‘The Use and Abuse of Monetary History’. In the article Eichengreen states “Imagine two central banks. One is hyperactive, responding aggressively to events. While it certainly cannot be accused of ignoring current developments, its policies are widely criticized as storing up problems for the future. The other central bank is unflappable. It remains calm in the face of events, seeking at all cost to avoid doing anything that might be construed as encouraging excessive risk-taking or creating even a whiff of inflation. What I have just described is no mere hypothetical, of course. It is, in fact, a capsule depiction of the United States Federal Reserve and the European Central Bank. One popular explanation for the two banks’ different approaches is that they stem from their societies’ respective historical experiences. The banks’ institutional personalities reflect the role of collective memory in shaping how officials conceptualize the problems that they face. The Great Depression of the 1930’s, when the Fed stood idly by as the economy collapsed, is the molding event seared into the consciousness of every American central banker. As a result, the Fed responds aggressively when it perceives even a limited risk of another depression. By contrast, the defining event shaping European monetary policy is the hyperinflation of the 1920’s, filtered through the experience of the 1970’s and 1980’s, when central banks were enlisted once again to finance budget deficits – and again with inflationary consequences. Indeed, delegating national monetary policies to a Europe-wide central bank was intended to solve precisely this problem. … For the Fed, it is important to ask whether the 1930’s, when its premature policy tightening precipitated a double-dip recession, really is the best historical analogy to consider when contemplating how to time the exit from its current accommodating stance. Certainly, the Great Depression is not the only alternative on offer.”  Inspired by Barry Eichengreen, Project Syndicate ow.ly/k6FvO Image source Twitter ow.ly/k6FsF Use and abuse of monetary history (May 9 2013)

 

Barry Eichengreen the 61 year old American Professor of Economics and Political Science at the University of California, has published an article on Project Syndicate titled ‘The Use and Abuse of Monetary History’. In the article Eichengreen states “Imagine two central banks. One is hyperactive, responding aggressively to events. While it certainly cannot be accused of ignoring current developments, its policies are widely criticized as storing up problems for the future. The other central bank is unflappable. It remains calm in the face of events, seeking at all cost to avoid doing anything that might be construed as encouraging excessive risk-taking or creating even a whiff of inflation. What I have just described is no mere hypothetical, of course. It is, in fact, a capsule depiction of the United States Federal Reserve and the European Central Bank. One popular explanation for the two banks’ different approaches is that they stem from their societies’ respective historical experiences. The banks’ institutional personalities reflect the role of collective memory in shaping how officials conceptualize the problems that they face. The Great Depression of the 1930’s, when the Fed stood idly by as the economy collapsed, is the molding event seared into the consciousness of every American central banker. As a result, the Fed responds aggressively when it perceives even a limited risk of another depression. By contrast, the defining event shaping European monetary policy is the hyperinflation of the 1920’s, filtered through the experience of the 1970’s and 1980’s, when central banks were enlisted once again to finance budget deficits – and again with inflationary consequences. Indeed, delegating national monetary policies to a Europe-wide central bank was intended to solve precisely this problem. … For the Fed, it is important to ask whether the 1930’s, when its premature policy tightening precipitated a double-dip recession, really is the best historical analogy to consider when contemplating how to time the exit from its current accommodating stance. Certainly, the Great Depression is not the only alternative on offer.”

 

Inspired by Barry Eichengreen, Project Syndicate ow.ly/k6FvO Image source Twitter ow.ly/k6FsF