Tuesday, November 13, 2007

The sequel: The Good, The Bad, and The Unpleasant Arithmetic, Part 2

Let's carry on the game. Get your cup of Kenyan now, and I'll play Miles Davis' Freddie Freeloader.

You remember Alesina and Summers, right? Those guys said that independent central bank is good for the economy. Now let me introduce you to another guys, who are more or less in the same camp in favor of central bank's virtue, Kydland and Prescott (1977). With their work on time inconsistency, they lean toward something called rules based over discretion policies and make the idea of inflation targeting popular. The two, independency and inflation targeting, are now becoming the norm for central banking.

But Greg Mankiw, 2006, disagrees. He said that independency is loosely connected with rule based inflation targeting. Alan Greenspan is the most notorious example for his flexibility and somewhat discretionary approach, yet his policy works. Moreover, citing the work of Ball and Sheridan (2005), for the larger sample. inflation targeting doesn't explain recent trend of low, stable inflation rate. Bluntly, independency is not the prerequisite for good monetary policy.

So now, Central Bank got their point cut. Central Bank 0 - MoF 0.

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