《货币经济学》课程文献阅读：Central Banking in a Democratic Society（Stiglitz,1998）

DE ECONOMIST 146. NO. 2. 1998 CENTRAL BANKING IN A DEMOCRATIC SOCIETY** JOSEPH STIGLITZ Key words: monetary policy, central bank independend I INTRODUCTION AND MAIN CONCLUSIONS It is a special pleasure for me to be here to give this lecture to honor Professor Tinbergen, because his many interests coincide so closely with my own. He spent much of his later life working on the economics of income distribution, a subject with which I began my professional life in my doctoral dissertation, and which has continued to be a focus of my concern. Tinbergen's thesis that the relative wages of skilled and unskilled workers depend on both supply and demand fac- tors resonates throughout my work on optimal taxation. Its importance has been borne out dramatically in wage movements in the United States and elsewhere during the past two decades. From my present vantage point, I am especially appreciative of his devotion to the economics of development, which became the focus of his concern in the mid-1950s, in order, as Tinbergen(1988)explained in retrospect, to contribute to what seemed to me the highest priority from a humanitarian standpoint But today, I want to focus on other aspects of his work: his contribution to economic policy, particularly the problems of controlling the economy, the rela tionship between instruments and objectives, and the scope for decentralization, which absorbed him and earned him international recognition in his early days. I have reflected a great deal upon these issues during the past four years, during which I served as economic adviser to the president of the United States. and especially the last two years, when I served as Chairman of the Council of Eco- nomic advisers 4 The author is on leave from Stanford University. The views express not necessarily those of any institution with which I am or have been affiliated. I acknowl edge the assistance of Jason Furman. Much of the research and ideas reported here ar work with him s Eleventh Tinbergen Lecture delivered on October 10, 1997 at De Nederlandsche Bank, Amster- dam for the Royal Netherlands Economic Association I See, for instance, Stiglitz(1986, 1998) De Economist 146.. 1998 1998 Klwwer Academic Publishers. Printed in the netherlands

CENTRAL BANKING IN A DEMOCRATIC SOCIETY** BY JOSEPH STIGLITZ* Key words: monetary policy, central bank independence 1 INTRODUCTION AND MAIN CONCLUSIONS It is a special pleasure for me to be here to give this lecture to honor Professor Tinbergen, because his many interests coincide so closely with my own. He spent much of his later life working on the economics of income distribution, a subject with which I began my professional life in my doctoral dissertation, and which has continued to be a focus of my concern. Tinbergen’s thesis that the relative wages of skilled and unskilled workers depend on both supply and demand fac￾tors resonates throughout my work on optimal taxation.1 Its importance has been borne out dramatically in wage movements in the United States and elsewhere during the past two decades. From my present vantage point, I am especially appreciative of his devotion to the economics of development, which became the focus of his concern in the mid-1950s, in order, as Tinbergen ~1988! explained in retrospect, ‘to contribute to what seemed to me the highest priority from a humanitarian standpoint.’ But today, I want to focus on other aspects of his work: his contribution to economic policy, particularly the problems of controlling the economy, the rela￾tionship between instruments and objectives, and the scope for decentralization, which absorbed him and earned him international recognition in his early days. I have reflected a great deal upon these issues during the past four years, during which I served as economic adviser to the President of the United States, and especially the last two years, when I served as Chairman of the Council of Eco￾nomic Advisers. * The author is on leave from Stanford University. The views expressed here are solely mine, and not necessarily those of any institution with which I am or have been affiliated. I wish to acknowl￾edge the assistance of Jason Furman. Much of the research and ideas reported here are based on joint work with him. ** Eleventh Tinbergen Lecture delivered on October 10, 1997 at De Nederlandsche Bank, Amster￾dam for the Royal Netherlands Economic Association. 1 See, for instance, Stiglitz ~1986, 1998!. DE ECONOMIST 146, NO. 2, 1998 De Economist 146, 199–226, 1998. © 1998 Kluwer Academic Publishers. Printed in the Netherlands

JE STIGLITZ I had the good luck to serve at a time of rising prosperity - and even im- oved income distribution, lowered poverty, and increased inclusion in our so- ciety of previously marginalized groups, such as minorities. The President took much credit for these achievements, and I often quipped that if some of the glory of what was, at least in some dimensions, the strongest economy in three decades should rub off on the President, should not at least some of that rub off on his economic adviser? After all, as my staff jokingly pointed out, while I was Chair- man of the Council the misery index -the sum of the inflation rate and the un- employment rate was half of what it was when Alan Greenspan was Chairman of the Council. Others suggested that it was not the administration which should get the credit, but the Federal Reserve Board To Tinbergen, this debate might have seemed strange indeed. Macroeconomic success depended on coordination of the monetary and fiscal instruments. It was Curiously enough, economic policymaking in United States- and in many other countries- is designed to inhibit this coordi- nation and cooperation. We have created independent central banks, who may and indeed are instructed to, pursue policies independently of the wishes of the elected officials. In the United States, the deliberations of the open market com- mittee which sets interest rates is kept secret -even from the President of the United States. To be sure, in the past, presidents have not been shy about ex- pressing to the Fed what they think it should do, but the Fed has not been shy about ignoring these messages. Early on in the Clinton Administration, we adopted a policy of not commenting on Fed policy, not because we did not have strong views -at certain critical stages, many in the Administration thought their policies were seriously misguided but because we thought a public debate would be counterproductive. We thought the Fed would not listen, the newspapers would love the controversy, and the markets, worried by the uncertainty that such con troversy generates, would add a risk premium to long-term rates, thereby incre ing those rates, which was precisely what we did not want to happen There is an irony in all of this. The President is held accountable for how the economy performs whether or not he has much control. Indeed, econometric models suggest that an infallible predictor of the outcome of presidential elec tions is the state of the economy; just as the weaknesses of the economy were largely responsible for Clinton's election in 1992, the strength of the economy was largely responsible for his re-election in 1996. The Council's own economet ric models in 1995 and 1996 corroborated the findings of others predicting an electoral outcome close to that which emerged suggesting that President Clin- ton really did not need to do all that campaigning 2 Interestingly, the perception of the state of the economy seems to be a more accurate electoral outcomes than the actual state of the economy. The incumbent party has won eve in which the University of Michigan's consumer sentiment index in the month before was above 92

I had the good luck to serve at a time of rising prosperity – and even im￾proved income distribution, lowered poverty, and increased inclusion in our so￾ciety of previously marginalized groups, such as minorities. The President took much credit for these achievements, and I often quipped that if some of the glory of what was, at least in some dimensions, the strongest economy in three decades should rub off on the President, should not at least some of that rub off on his economic adviser? After all, as my staff jokingly pointed out, while I was Chair￾man of the Council the misery index – the sum of the inflation rate and the un￾employment rate – was half of what it was when Alan Greenspan was Chairman of the Council. Others suggested that it was not the Administration which should get the credit, but the Federal Reserve Board. To Tinbergen, this debate might have seemed strange indeed. Macroeconomic success depended on coordination of the monetary and fiscal instruments. It was the two working together. Curiously enough, economic policymaking in the United States – and in many other countries – is designed to inhibit this coordi￾nation and cooperation. We have created independent central banks, who may, and indeed are instructed to, pursue policies independently of the wishes of the elected officials. In the United States, the deliberations of the open market com￾mittee which sets interest rates is kept secret – even from the President of the United States. To be sure, in the past, presidents have not been shy about ex￾pressing to the Fed what they think it should do, but the Fed has not been shy about ignoring these messages. Early on in the Clinton Administration, we adopted a policy of not commenting on Fed policy, not because we did not have strong views – at certain critical stages, many in the Administration thought their policies were seriously misguided – but because we thought a public debate would be counterproductive. We thought the Fed would not listen, the newspapers would love the controversy, and the markets, worried by the uncertainty that such con￾troversy generates, would add a risk premium to long-term rates, thereby increas￾ing those rates, which was precisely what we did not want to happen. There is an irony in all of this. The President is held accountable for how the economy performs – whether or not he has much control. Indeed, econometric models suggest that an infallible predictor of the outcome of presidential elec￾tions is the state of the economy;2 just as the weaknesses of the economy were largely responsible for Clinton’s election in 1992, the strength of the economy was largely responsible for his re-election in 1996. The Council’s own economet￾ric models in 1995 and 1996 corroborated the findings of others predicting an electoral outcome close to that which emerged – suggesting that President Clin￾ton really did not need to do all that campaigning. 2 Interestingly, the perception of the state of the economy seems to be a more accurate predictor of electoral outcomes than the actual state of the economy. The incumbent party has won every election in which the University of Michigan’s consumer sentiment index in the month before the election was above 92. 200 J.E. STIGLITZ

CENTRAL BANKING While the President is held accountable, his major tools for affecting the mac. roeconomy have been removed. Deficit stringency has removed the scope for dis- cretionary fiscal policy(though fiscal impacts played a role in the fine tuning of the 1993 deficit reduction plan; and the independence of the Fed has removed the Executive Branchs influence over monetary policy. Members of the Admin- stration did communicate privately, in weekly, sometimes daily, conversations We shared our views of what was happening to the economy but we did not always agree. And according to the rules of the game that we adopted, we did not participate in the public debate on monetary policy In a democracy, public discussion and debate about issues of central impor- tance, like the management of the economy, are essential. The Council of Eco- nomic Advisers did attempt to contribute to this discussion but obliquely, es- pecially in the Annual Economic Report of the President Today, I want to address two issues which I felt stifled from discussing more openly during my tenure at the Council of Economic Advisers. The first issue concerns the principles of monetary policy in a low-inflation environment such has prevailed in the United States for the past decade and half how should it set its targets? Should it seek to take pre-emptive strikes against inflation? Is it true that it cannot, or at least should not, wait to act until the white of the eyes of infilation' can be seen? The second issue is more fundamental: what should be the institutional arrangements by which monetary policy is set in a democratic independent should th what should be its governance? Who should choose those who essentially control the economy, and what characteristics should these decision makers have? Though I do not wish to give away my bottom lines, to pique your interest, let me hint at the conclusions i shall draw 1. Monetary policy matters, and the successful conduct of macropolicy in the postwar period has led to far greater stability of the economy. This is not to imply that American economic policy has been perfect- major mistakes, some arising from an imperfect understanding of the economy, have at times con- tributed to unnecessarily high unemployment or to the economy enjoying tronger boom than intended 2. In particular, I will argue that the strategies of opportunistic disinflation or pre-emptive strikes are based on a set of hypotheses about the economy for which there is little empirical support. I will argue, at least in the context of the American economy today, for an alternative, which I call cautions expan 3 Perhaps now that th he United States appears on the verge of fiscal surpluses there will be more ope for fiscal policies. But some of the budgetary processes designed to curb public profligacy may inhibit the effective exercise of countercyclical fiscal

While the President is held accountable, his major tools for affecting the mac￾roeconomy have been removed. Deficit stringency has removed the scope for dis￾cretionary fiscal policy ~though fiscal impacts played a role in the fine tuning of the 1993 deficit reduction plan;3 and the independence of the Fed has removed the Executive Branch’s influence over monetary policy. Members of the Admin￾istration did communicate privately, in weekly, sometimes daily, conversations. We shared our views of what was happening to the economy – but we did not always agree. And according to the rules of the game that we adopted, we did not participate in the public debate on monetary policy. In a democracy, public discussion and debate about issues of central impor￾tance, like the management of the economy, are essential. The Council of Eco￾nomic Advisers did attempt to contribute to this discussion – but obliquely, es￾pecially in the Annual Economic Report of the President. Today, I want to address two issues which I felt stifled from discussing more openly during my tenure at the Council of Economic Advisers. The first issue concerns the principles of monetary policy in a low-inflation environment such has prevailed in the United States for the past decade and half – how should it set its targets? Should it seek to take pre-emptive strikes against inflation? Is it true that it cannot, or at least should not, wait to act until the ‘white of the eyes of inflation’ can be seen? The second issue is more fundamental: What should be the institutional arrangements by which monetary policy is set in a democratic society? How independent should the central bank be? And if it is independent, what should be its governance? Who should choose those who essentially control the economy, and what characteristics should these decision makers have? Though I do not wish to give away my bottom lines, to pique your interest, let me hint at the conclusions I shall draw: 1. Monetary policy matters, and the successful conduct of macropolicy in the postwar period has led to far greater stability of the economy. This is not to imply that American economic policy has been perfect – major mistakes, some arising from an imperfect understanding of the economy, have at times con￾tributed to unnecessarily high unemployment or to the economy enjoying a stronger boom than intended. 2. In particular, I will argue that the strategies of opportunistic disinflation or pre-emptive strikes are based on a set of hypotheses about the economy for which there is little empirical support. I will argue, at least in the context of the American economy today, for an alternative, which I call cautions expan￾sionism. 3 Perhaps now that the United States appears on the verge of fiscal surpluses there will be more scope for fiscal policies. But some of the budgetary processes designed to curb public profligacy may inhibit the effective exercise of countercyclical fiscal policy. CENTRAL BANKING 201

JE STIGLITZ 3. There is a rationale for a degree of independence of the central bank, even in a democratic society. But the central bank must be accountable, and sensitive to democratic processes; there must be more democracy in the manner which the decision makers are chosen and more representativeness in the gov- ernance structure. The movement in the opposite direction in some places is particularly disturbing 2 MONETARY POLICY MATTERS: THE STABILIZATION OF THE POSTWAR BUSINESS CYCLE Before answering the two questions which are the focus of my concern today, I have to address a prior issue: Does monetary policy matter? For clearly, if mon etary policy has no effect, then the design of monetary institutions, the choice of monetary policy strategy, and the coordination of monetary and fiscal policy do not matter. I believe strongly that monetary policy does matter- and it was not just frustration with our inability to use discretionary fiscal policy combined with envy of the economic power of those sitting along Constitution Avenue in the Federal Reserve Board building that led me to this conclusion. This conclusion was based on theoretical work that I had done before entering governmentand recent empirical work by Francis Diebold and Glenn Rudebusch(1992), which we have confirmed and extended. Their findings have not received the attention they deserve, they shed light on a long-standing controversy about whether there are in fact business cycles or simply random economic fluctuations. Their some- what surprising conclusion is that there appear to have been cycles prior to the Great Depression, but that in the postwar period, these cycles- in the sense of regular periodic movements in output- have been eliminated. Before turning to the statistical results, let me comment briefly on the circumstances that led up to my work in this area Though we did not control monetary policy it was important for us to have views on where the economy was going and what we thought monetary policy should be. My friend Jacob Frenkel(governor of the Central Bank of Israel)once quipped that central bankers have a fascination with fiscal policy -they are al- ways willing to comment on the appropriate size of the deficit(zero), though they thought it inappropriate for the fiscal authorities to comment on monetary policy. By the same token, we had a fascination with monetary policy -and wished we could comment on it It is remarkable how little insight into these issues is shed by current macro- economics. One major school of thought, Real Business Cycles, argues that there is no involuntary unemployment. It was hard to tell that story to the president who was elected on a platform of Jobs, Jobs, Jobs!, or to the voters in Califor nia, when unemployment -they did not think it was just a superabundance of 4 See, for instance, Greenwald and Stiglitz (1990, 1993)

3. There is a rationale for a degree of independence of the central bank, even in a democratic society. But the central bank must be accountable, and sensitive, to democratic processes; there must be more democracy in the manner in which the decision makers are chosen and more representativeness in the gov￾ernance structure. The movement in the opposite direction in some places is particularly disturbing. 2 MONETARY POLICY MATTERS: THE STABILIZATION OF THE POSTWAR BUSINESS CYCLE Before answering the two questions which are the focus of my concern today, I have to address a prior issue: Does monetary policy matter? For clearly, if mon￾etary policy has no effect, then the design of monetary institutions, the choice of monetary policy strategy, and the coordination of monetary and fiscal policy do not matter. I believe strongly that monetary policy does matter – and it was not just frustration with our inability to use discretionary fiscal policy combined with envy of the economic power of those sitting along Constitution Avenue in the Federal Reserve Board building that led me to this conclusion. This conclusion was based on theoretical work that I had done before entering government4 and recent empirical work by Francis Diebold and Glenn Rudebusch ~1992!, which we have confirmed and extended. Their findings have not received the attention they deserve; they shed light on a long-standing controversy about whether there are in fact business cycles or simply random economic fluctuations. Their some￾what surprising conclusion is that there appear to have been cycles prior to the Great Depression, but that in the postwar period, these cycles – in the sense of regular periodic movements in output – have been eliminated. Before turning to the statistical results, let me comment briefly on the circumstances that led up to my work in this area. Though we did not control monetary policy it was important for us to have views on where the economy was going and what we thought monetary policy should be. My friend Jacob Frenkel ~governor of the Central Bank of Israel! once quipped that central bankers have a fascination with fiscal policy – they are al￾ways willing to comment on the appropriate size of the deficit ~zero!, though they thought it inappropriate for the fiscal authorities to comment on monetary policy. By the same token, we had a fascination with monetary policy – and wished we could comment on it. It is remarkable how little insight into these issues is shed by current macro￾economics. One major school of thought, Real Business Cycles, argues that there is no involuntary unemployment. It was hard to tell that story to the President, who was elected on a platform of ‘Jobs, Jobs, Jobs!’, or to the voters in Califor￾nia, when unemployment – they did not think it was just a superabundance of 4 See, for instance, Greenwald and Stiglitz ~1990, 1993!. 202 J.E. STIGLITZ

CENTRAL BANKING exceeded 10 percent. Another major school, new classical economics emphasis on rational expectations, argues that monetary policy is inef because the private sector would adjust its expectations and actions to undo any systematic monetary policies. If correct, concerns about policy coor- dination are not of much importance! And if correct, the myriad of economists, in government and business, and the multitude of reporters, who were engaged in trying to figure out what the Fed was about to do, are all behaving irrationally While these schools of thought might have little sway in the real world of govern- ment or business, they have had remarkable influence in academia over the past quarter century, especially in America. Both of these schools suggested that difficulties in the Council of hiring macroeconomists from academia who knew something about the economy was of no consequence: they would be wasting their time in any case. Needless to say, these were perspectives with which I had little sympathy As the economy continued the robust recovery from the 1990-1991 recession, I was asked by reporters with increasing frequency, did I expect the recovery to end. Their view was that the economy was perched on a knife-edge, ready to fal off into a recession on one side or rising inflation on the other. Furthermore, they seemed to believe that the longer an expansion lasted, the more likely there was to be a downturn. In contrast, I believed in Keynes' animal spirits, and believed that those animal spirits might be driven, if ever so gently, towards a more fa- vorable view of the economy, and hence stronger investment. The fundamentals of the Us economy were clearly sound, but I wanted to make a further argu- ment: that expansions do not end of old age, a popular way of saying that there was no such thing as a business cycle. The results in Figure 1 provide dramatic support for this argument as applied to the post-World War Il US economy -the probability of an expansion ending appears to be independent of its length. This result should not come as a surprise, if one makes three assumptions: monetary policy seeks to maintain expansions, monetary policy is forward-looking, and monetary policy is somewhat effective. For if there were any systematic time de pendency or dependency on time and other observable variables- the mon- etary authorities should seek to take offsetting actions. The result does not re- uire that the monetary authorities be perfectly efficient, only that any errors have no systematic component to them 5 In real business-cycle theory, monetary policy is not only not needed, but ineffective. In some variants of rational expectations models, monetary policy can have effects, but only to the extent tha the actions of the monetary authorities are imperfectly observed, or observed with a lag 6 Diebold and Rudebusch(1992)find no time dependence at all. Our results show a slight time dependence, which disappears once other, easily observed variables are taken into account. The ex- istence of some time dependence, even with an effective monetary policy, is to be expected, if there are variables or events (like large excess inventories)the occurrence of which increases with the length of the expansion, and if monetary policy cannot perfectly offset the effects. Effective monetary policy eliminates any systematic cyclical fluctuation associated with such variables ents

leisure – exceeded 10 percent. Another major school, new classical economics, with its emphasis on rational expectations, argues that monetary policy is inef￾fective, because the private sector would adjust its expectations and actions to undo any systematic monetary policies.5 If correct, concerns about policy coor￾dination are not of much importance! And if correct, the myriad of economists, in government and business, and the multitude of reporters, who were engaged in trying to figure out what the Fed was about to do, are all behaving irrationally. While these schools of thought might have little sway in the real world of govern￾ment or business, they have had remarkable influence in academia over the past quarter century, especially in America. Both of these schools suggested that our difficulties in the Council of hiring macroeconomists from academia who knew something about the economy was of no consequence: they would be wasting their time in any case. Needless to say, these were perspectives with which I had little sympathy. As the economy continued the robust recovery from the 1990–1991 recession, I was asked by reporters with increasing frequency, did I expect the recovery to end. Their view was that the economy was perched on a knife-edge, ready to fall off into a recession on one side or rising inflation on the other. Furthermore, they seemed to believe that the longer an expansion lasted, the more likely there was to be a downturn. In contrast, I believed in Keynes’ animal spirits, and believed that those animal spirits might be driven, if ever so gently, towards a more fa￾vorable view of the economy, and hence stronger investment. The fundamentals of the US economy were clearly sound, but I wanted to make a further argu￾ment: that expansions do not end of old age, a popular way of saying that there was no such thing as a business cycle. The results in Figure 1 provide dramatic support for this argument as applied to the post-World War II US economy – the probability of an expansion ending appears to be independent of its length.6 This result should not come as a surprise, if one makes three assumptions: monetary policy seeks to maintain expansions, monetary policy is forward-looking, and monetary policy is somewhat effective. For if there were any systematic time de￾pendency – or dependency on time and other observable variables – the mon￾etary authorities should seek to take offsetting actions. The result does not re￾quire that the monetary authorities be perfectly efficient, only that any errors have no systematic component to them. 5 In real business-cycle theory, monetary policy is not only not needed, but ineffective. In some variants of rational expectations models, monetary policy can have effects, but only to the extent that the actions of the monetary authorities are imperfectly observed, or observed with a lag. 6 Diebold and Rudebusch ~1992! find no time dependence at all. Our results show a slight time dependence, which disappears once other, easily observed variables are taken into account. The ex￾istence of some time dependence, even with an effective monetary policy, is to be expected, if there are variables or events ~like large excess inventories! the occurrence of which increases with the length of the expansion, and if monetary policy cannot perfectly offset the effects. Effective monetary policy eliminates any systematic cyclical fluctuation associated with such variables or events. CENTRAL BANKING 203