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Commentary
- Edited by David E. Altig, Federal Reserve Bank of Cleveland, Bruce D. Smith, University of Texas, Dallas
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- Book:
- Evolution and Procedures in Central Banking
- Published online:
- 31 July 2009
- Print publication:
- 11 September 2003, pp 82-92
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Summary
INTRODUCTION
It's always a pleasure to read a paper by Charles Goodhart, who brings a unique blend of academic rigor and originality, frontline experience, and plain common sense to his musings on central banking. Goodhart points out that the controlling consensus for monetary policy is that it should be focused on achieving and maintaining price stability over time. Both economic theory and experience indicate that prolonged deviations from reasonable price stability—in either direction—can have serious negative implications for economic performance.
Goodhart highlights a number of issues that arise in implementing policy within this framework. I'm not going to comment directly on Goodhart's paper. Rather, reading the paper sparked my own musings on some areas that might benefit from further research, and I thought that with the Federal Reserve Bank of Cleveland launching its Central Bank Institute, this might be an opportune moment for such a discussion. There is considerable overlap between Goodhart's topics and my own; in large measure he was my inspiration, though in some cases we come at the same subject from different angles. I call this comment “Whither Central Banking Research?” Obviously, my list is not a complete research agenda; rather, it covers four topics that have caught my attention in my work with the Federal Reserve, reinforced in some cases by my experience at the Bank of England.
2 - Finance, public policy, and growth
- Edited by Gerard Caprio, The World Bank, Izak Atiyas, The World Bank, James A. Hanson, The World Bank
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- Book:
- Financial Reform
- Published online:
- 20 May 2010
- Print publication:
- 27 January 1995, pp 13-48
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Summary
Introduction
Development economists have long argued that the evolution of financial markets is an important dimension of growth. A corollary view is that financial repression in many less developed countries (LDCs) is a serious obstacle to progress. But, unfortunately, many countries have had disappointing experiences with liberalization. Freeing up financial markets at times has appeared to produce chaos rather than growth, forcing many countries to retreat from deregulation. With economic stagnation seeming to persist in many developing and transitional economies, policymakers face a dilemma: Should they cling to repressed financial markets or, instead, should they try the road to reform – in some cases, once again?
In this paper we reconsider the relation between finance and growth, and the appropriate role of government policy. We update earlier treatments of the subject by applying insights from recent theoretical literature that draws out the connection between the efficiency of financial markets and macroeconomic performance. We try to sketch informally a paradigm meant to be useful for thinking about the special problems that plague financial systems of developing countries. The overriding objective is to provide a basis for thinking about the process of financial reform. In addition, we present some macroeconomic evidence bearing on the relation between finance and growth.
Section 2.2 develops a benchmark for analysis by characterizing the role of financial markets in a setting of perfect markets. Section 2.3 provides a brief overview of the stylized facts on the relation between finance and growth.
Discussion
- Edited by Colin Mayer, University of Warwick, Xavier Vives, Universitat Autònoma de Barcelona
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- Book:
- Capital Markets and Financial Intermediation
- Published online:
- 04 August 2010
- Print publication:
- 20 May 1993, pp 190-196
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Summary
This paper is part of an ongoing research project by the authors. The objective is to provide measures of the relation between growth and the depth of the financial system. Their research updates earlier work on the problem, beginning with Goldsmith's classic treatise, Financial Structure and Development (1969). Their work is both comprehensive and systematic. It is likely to be a useful guide to anyone planning to study in the area.
The central theme is in sharp contrast to most of the recent work in growth theory. This new work tends to abstract from the organization and performance of markets as a factor in development, and instead focuses on endogenous technological change as the engine of growth. Financial trade is typically frictionless in these frameworks. Miller–Modigliani applies. As a consequence, these frameworks contain no predictions about the relation between financial markets and development.
I view the objective of the authors' research and related work by others as an effort to redirect some attention to studying how the evolution of markets, particularly financial markets, contributes to the growth process. In this regard, the work returns to an earlier tradition in the development literature, one associated with Gurley and Shaw (1955), Goldsmith (1969) and others. The research also follows recent work in macroeconomics which has been examining the role of financial market imperfections in the business cycle (see Gertler, 1988, for a survey). Some of the general methodology that this macroeconomics literature has used to study how credit market frictions might propagate business cycles is now being applied to consider how these frictions might affect growth.
5 - Banking and macroeconomic equilibrium
- Edited by William A. Barnett, Kenneth J. Singleton
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- Book:
- New Approaches to Monetary Economics
- Published online:
- 04 August 2010
- Print publication:
- 31 July 1987, pp 89-112
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Introduction
The Miller–Modigliani theorem asserts that, in a setting of perfect capital markets, economic decisions do not depend on financial structure. An implication is that the addition of financial intermediaries to this type of environment has no consequence for real activity.
A number of recent papers [e.g., Bernanke (1983), Blinder and Stiglitz (1983), Boyd and Prescott (1983), Townsend (1983), and Williamson (1985)] have questioned the relevance of this proposition, even as an approximation, for macroeconomic analysis. Instead, they revive the view of Gurley and Shaw (1956), Patinkin (1961), Brainard and Tobin (1963), and others that the quality and quantity of services provided by intermediaries are important determinants of aggregate economic performance. The basic premise is that, in the absence of intermediary institutions, informational problems cause financial markets to be incomplete. By specializing in gathering information about loan projects, and by permitting pooling and risk-sharing among depositors, financial intermediaries help reduce market imperfections and improve the allocation of resources. Thus, changes in the level of financial intermediation due to monetary policy, legal restrictions, or other factors may have significant real effects on the economy. For example, Bernanke (1983) argued that the severity of the Great Depression was due in part to the loss in intermediary services suffered when the banking system collapsed in 1930–33.
The objective of this paper is to provide an additional step toward understanding the role of financial intermediaries (hereafter, simply “banks”) in aggregate economic activity.