The Central Bank

Abstract

The world’s central banks currently operate under a philosophy of control rather than accommodation. According to the implicit assumption underlying this philosophy, a central bank somehow possesses superior information, knowledge, or ability to determine the appropriate level of whatever economic variable(s) it seeks to control. Consequently it is justified in attempting to prevent or offset business conditions it considers adverse and to promote conditions it deems desirable. In the U.S., for example, the Federal Reserve is allowed to select from an array of potentially conflicting goals the rate of inflation, level of unemployment, rate of economic growth, or the exchange rate it considers best for the economy. It neither consults a constituency in making its selection nor offers any specific information to the private sector either as to its long-run objectives or as to precisely how it expects to attain those objectives. It does announce broad ranges for twelve-month target rates of growth for several monetary arrgregates. But it is not uncommon to find one or more of these aggregates lying outside is targeted range. Becasue the Fed does not reveal the extent to which it is committed to keeping these measures within their targeted bounds, the financial markets must continually guess what the Fed will or will not do next.