History of 150 years of monetary policy in 7 sentences….

December 4, 2017

Missed this speech by John Williams of FRBSF which he gave on 16 Nov 2017.

The speech is on low r-star (natural rate of interest) in the developed world. Prof Phelps recently said: there is nothing natural about natural rate of unemployment, this should be extended to natural rate of interest as well.

As he discusses why we have low r-star and what to do about it, there is this bit on 150 years monetary history. He said ideally would have liked to sum the history in 140 characters but that will hardly cover anything. But how about summing the history in 7 sentences. Here are the 7 sentences:

  1. During the late 19th century, most economies were on the gold standard, the first monetary policy framework where currency was valued at a fixed amount of gold.
  2. Following the First World War and the Great Depression, countries started to move off the gold standard, and policymakers started to think about what might replace it.
  3. Out of that came the Bretton Woods system in 1944, which also tied the currencies of developed economies to the price of gold.
  4. But the cost of the Vietnam War and inflation that followed led to the collapse of Bretton Woods in the early 1970s.
  5. Once again policymakers looked around for a solution, and in 1989, the small country of New Zealand announced the main objective of its monetary policy was to target the inflation rate.
  6. In the subsequent quarter century, nearly all central banks in major economies coalesced around this approach of aiming for a low inflation rate, and, indeed, inflation targeting is the monetary policy framework du jour.
  7. But even New Zealand has admitted this framework was more “by default than by high design,” and one must ask if it’s the right approach for the future we have before us.

Superb! Pretty much sums it in these 7 crisp sentences.

I leave the reading on r-star related stuff to the readers…


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