Central Banking in Theory and Practice by Alan S Blinder - Book Report/Review Example

XYZ Central Banking in Theory and Practice by Alan S Blinder Cambridge, MA MIT Press February 1998 Central Banking in Theory and Practice by Alan S Blinder It was quite by accident that I chanced upon an extraordinary book by American Economist and ex vice chairman of the United States Federal Reserve Board Alan Stuart Blinders Central Banking in Theory and Practice. Based and adapted on the 1996 Lionel Robbins Lectures, who incidentally was a, the book is a series of three lectures given at Cambridge University. I found the book not only informative but also liked the way it gives scope for understanding the theory and practice of central banking at even a layman level. Alan Blinder has tried to make Central Banking in Theory and Practice an easy read for readers of all educational backgrounds. So you don’t have to be an economist or a central bank employee for reading the book! It is written in a pretty non-technical manner and addresses various monetary policy issues. Alan Blinders is a professor of economics at Princeton University and has co-authored with William Baumol to produce an economics textbook. He is known to be articulate and is a prominent New Keynesian economist. A lot of adjectives have been used to describe Alan Blinders like being highly intelligent, unbiased, dispassionate, at the same time possessing a strong sense of duty and passion towards issues in the public interest. Professor Blinder conveys thoroughly and admits easily enough the many limitations of both economic theory and historical evidence to the contrary. He delivers well through his book and makes the understanding of a lot of issues in the financial world, a nice read. The book starts with a basic assumption that the society basically needs the services of the central bank to keep the market economy on a stable trend. This includes matters of getting full employment, keeping low inflation, and stabilizing economic growth rate. Professor Blinder explains what he considers and thinks is the way a central banker should operate. Firstly, people should realize that he is pursuing multiple goals at the same time, and thereby has his concentration divided among a lot of tasks that need his brilliant guidance. Secondly, he must have an econometric model to make a vision for the future. Technically, it’s to estimate where the economy is going and what the collision would be if the policy tools at the Federal Reserve's removal were applied in a variety of quantitative and qualitative ways. The most relevant thing in Central Banking in Theory and Practice is the functioning of central banks. That’s what the whole book revolves around. The author brings to our attention the way it is presumed and the way it actually is; Theory and practice. Alan Blinder explains what central bankers need to learn from the ivory towers and vice-versa. The book caters to all audiences: to the academia’s, it suggests areas of research and valuable critiques to the fact that central banks take decisions which are made by a committee. The common man is given an enticing tour of the core issues faced by the central banking system [The Economist]. As you read through the book, you start to realize that the central banking looks rather different in practice than it does in theory. Allan Blinder has seen both sides of the coin and offers his viewpoints on this issue. The author has discussed extensively the macro econometric model and has tried to state it in an informative manner. In fact, the first lecture itself tries to explain the basics of how central banks take econometric models to set policy instruments. Blinder explains that this involves a whole lot of assumptions, mainly about the model selection, the lag structure, the need for forecasts and the choice of policy instruments. I came across a very insightful passage online, taken from The Wealth of Nations, in which Smith argued: "The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which can safely be trusted, not only to no single person, but to no council or senate whatsoever, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it" Such intonations are actually found on practically every page of Alan Blinder's book, Central Banking in Theory and Practice. The author admits that no one knows the "correct" statistical model of a modern complex market economy. The interrelationships are too bottomless and the quantitative interconnections are continually changing because of the moves in various factors on both the supply and demand side of the market. It’s advisable to simulate through the computer as many different econometric models as possible and exclude any extreme results. Then it would be easy to operate on the basis of an average of all the rest. The main problem, of course, is that the policies are then being executed on the basis of an aggregated average of numerous other averages that are short and snappy with regards to all the individual market decisions and relationships. These factors are really at work in a constantly changing market process. Any alter in central-bank monetary policy directed by such a standard of many other averages will absolutely influence a whole lot of individual price, wage, resources, and production decisions. It will distort market information on whose basis millions of people in the economy attempt to co-ordinate their supply and demand activities with others in the field of exchange. Professor Blinder asks what policy instrument the central bank should focus on in trying to influence the path the economy will follow. True to his Keynesian thought process, he refuses to give any attention to the money supply. Instead, he declares that the Federal Reserve should aim short-run interest rates that can more or less be straight prejudiced. That’s done by adding to or subtracting from the bank reserves on which the commercial banking system extends loans to the market. This policy, however, totally takes no notice of the fact that interest rates are real state phenomena, just similar to all the other prices and earnings in the market. Interest rates, when influenced by political authorities and central banks, influence the genuine forces of supply and demand between investors and borrowers. And as such, interest rates are supposed to keep investments in entirety with the obtainable savings. Central bank monetary manipulations always threaten to push investment decisions out of balance in the actual savings present in the economy. This results in bringing about dangerous misuse of resources in the production and services sector of the economy. In the last chapter, Professor Blinder says that he wishes to see central banks independent. By "independence," he means the power to implement monetary policies. The central bank, once given its marching instructions concerning the goals to chase, should have the independence to implement that policy according to how the intelligent and detached central bankers think it should be completed. The author tries to consider which policy instruments the banks should use. Blinder argues for using "the estimated real short-term rate of interest" instead of a monetarist approach; he also suggests that the neutrality of the monetary policy should be measured by comparing it with real interest rates, even if it is difficult to estimate that and know it with precision. Guitián is of the opinion that Central Banking in Theory and Practice brings the readers’ attention to a lot of theories that central banks will succumb to for reaching its short-term gains and keeping the inflation rates high. Romar and Romer in her own book had said: "The academic literature has focused on either the wrong problem or a non problem and has proposed a series of solutions that make little sense in the real world." In the third and last lecture Blinder puts the case for central bank independence, from markets as well as from governments and public opinion as follows: "Following the markets too closely ... may lead the central bank to inherit precisely the short time horizon that central bank independence is meant to prevent." He also argues that banks with more credibility in fighting inflation can cause disinflation at real lower social cost. Eijffinger and Waller had once stated: "Much fascinating theory to the contrary, I do not know a shred of evidence that supports it." It is a common fact that central bankers are influenced by political agendas and major ideological biases. But Alan Blinder does not agree at all. From his two years on the Board of Governors of the Federal Reserve System and from his communication with the central-bank managers of the main nations of the world, Professor Blinder now knows that they are usually just like him: only worried with the superior public interest and the elevated universal good. They are like modern philosophers, only wanting to do what is correct for each and every one of concerned. Alan Blinder feels disappointed that those who were invited to deliver the Lord Robbins Lectures at the London School of Economics never seemed to take the time to familiarize themselves with the writings of the economist in whose honor they were asked to speak. Though, he was not an advocate of any tremendous laissez faire, particularly in his writings in the 1930s, always highlighted the hazards from government misconduct of money and the declining of the monetary system. Robbins advocated a market-based monetary scheme such as a gold standard because men, no matter how in good health intentioned they may believe of themselves, could not be dependable to not neglect the likely workings of the money market. It is too awful that the late Lord Robbins was not in the spectators when Alan Blinder conveyed his talks to accurate his hubris and pretence of knowledge! I personally found Central Banking in Theory and Practice a fascinating book and introduced me to a world that I was little unaware about. I would have raised hands to a fourth lecture that gave a glimpse of the past of central banking, and possibly hooked on more detail about central bank institutional constitutions. Also would have loved to know Blinders take on the same. The author is a proven master in the field of economics and going through his works always ends in an interesting read. Central Banking in Theory and Practice is a well written and a well constructed book, which could help many economic students in their study courses; to enhance so many monetary concepts which they study every day. Go ahead and grab the classic today. Works Cited: Smith, Adam, The Wealth of Nations, USA: Packard Technologies, 1776 Guitián, Manuel, Rules and Discretion in International Economic Policy, Washington, USA: International Monetary Funds, 1992 Romer, Christina, and Romer, David, Reducing Inflation: Motivation and Strategy, USA: University of Chicago Press, 1997 Eijffinger, Sylvester, and Waller, Sandra The Political Economy of Central-Bank Independence, MA: MIT Press, 2005 Read More