by Dirk Ehnts
The effort by Howard Davies and David Green to write a book on “what lessons should central banks learn from the [crisis] experience” is something which makes me itch. Why? I think the main reason is that I am a self-educated macro-economist, in the sense that I am not in the loop of central bank stuff - lectures, PhD programmes, internships at (central) banks, the financial lingo and all that. Therefore the topics that appear in the book seem much too technical and, from my point of view, many are probably irrelevant anyways. Chapter 6 – Structure, Status, and Accountability – gets very institutional and historical. What lessons can be learned from this chapter I cannot imagine.
What lessons should be learned, however, is clear to me and is where I disagree with the authors. International macroeconomics calls for research on global imbalances, the carry trade, the situation of Japan (post-bubble) and the implications of the rise of the BRICs, among other things. I can’t find these issues discussed at length in the book. Some are mentioned in passing, but I think that it's fundamental to go beyond the underpant-gnome-hypothesis of inflation-targeting (which they want to keep, p. 287), expressed as:
- Create a macroeconomic environment of low inflation.
- Economic growth!
The way monetary theory developed, central banks became places where participants did not think of themselves as part of (academic) society, but thought they belonged to a temple of technocrats that provided the public with a priceless service. This myth has been dispelled. Central bankers should understand the functioning of the economy because as it turns out, social systems are more complex than we thought. It's good to have models, but nevertheless knowledge of the workings of the real world (including markets) is indispensable.
As you can see, I have left my paved road and ended up in the jungle, cutting through the underwood with my machete to get a clearer view of the forest. I don’t think Howard Davies and David Green have written a bad book. I just think this kind of book does not answer the question mentioned in the inlet: “what lessons should central banks learn from the [crisis] experience”. In fact, the book doesn’t elaborate on “The Fall and Rise of Central Banking” either. When did it fall, and why, or when did it rise and when will it rise again, and why? This book leaves me with the impression that central banks need to open up and invite other voices. Not all of what they have done has been wrong, but there is much more they need to know.
Opinion Blog articles by Dirk Ehnts
About the Author
Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101. Curriculum Vitae.