Not the Treasury View...

In preparing for the lectures this coming term, I've been looking over Chapters 14 to 17 in Sloman, the textbook we use. Particularly Chapter 16 looks at the development of macroeconomics, and the role the UK Treasury, alongside John Maynard Keynes, played in this development.

It's a fascinating story that we'll think about much more in the first few weeks of term. In the meantime though, it reminded me of an excellent blog that I subscribe to the posts from, called Not the Treasury View, and is written by Jonathan Portes at the National Institute of Economic and Social Research. The name harks back to what was the Treasury view back in the time of Keynes, around the Great Depression of the 1920s and 1930s - namely to balance the budget and trust that in the long run the economy would return to equilibrium and growth.

Keynes provided the alternative view, namely that government could, and should do more than this, and actively intervene in the case of deficient demand, as it was argued was the case back then. It's argued by many (for example, see another interesting blogger, John Quiggin here on unemployment) that Keynes was the founder of macroeconomics as we know it, pointing out that the economy as a whole could experience long periods of disequilibrium, characterised by high unemployment.

I'd really recommend subscribing to the RSS feed from Not the Treasury View. You may initially think Portes to simply be a leftie hence a critic of Tory policy, yet if you dig far enough back you'll find he's critical of all government policy that flies in the face of simple economic theory and evidence. Part of the course this term is to start forming coherent analyses of government policy - you can do much worse than become an avid reader of Not the Treasury View.

What do Central Banks do?

I'm lecturer for second term (econ101b), which is macroeconomics. Currently Martin Jensen is lecturing you on microeconomics, and so when I post I'll be pointing you towards macroeconomic events and news and how that links in to what we'll look at next term.

One thing we'll ask next term is: What do Central Banks do? They are always in the news, particularly around Monetary Policy Committee (MPC) meeting times in the UK. The Bank of England is the Central Bank for the UK. In the US, a system called the Federal Reserve System operates in place of a single Central Bank, and there are Federal Reserves of a number of regions in the US - Minneapolis, New York, Philadelphia, San Francisco, etc. But they all hang together under the Federal Reserve, naturally headquartered in Washington. Their equivalent of the MPC called the FOMC, or the Federal Open Market Committee.*

But what do these Central Banks actually do? Generally they are given responsibility for monetary policy in most economies: The MPC sets interest rates to achieve an inflation target, the idea being that if inflation is kept low and stable, the macroeconomy will stay roughly in order. In the US, the objective of the Federal Reserve is a little wider than just inflation and includes the wider macroeconomy.

There have been many criticisms over the years about whether targetting is the right thing: What's the right target? Why just inflation? Why not asset prices? What is the effect of different targets? An alternative school of thought, pushed more than most by an economist called Scott Sumner, is that Central Banks should target nominal GDP (that's GDP in the actual prices we pay before any correction is carried out for inflation).

It turns out that in its most recent meeting the FOMC hinted it may well begin such a targetting exercise. Next term we'll consider much more what this actually means, other that at the basic level it means that the Federal Reserve would target a particular level of nominal GDP (NGDP) and hence choose interest rates and other monetary tools in order to achieve this aim, just like currently the Bank of England chooses interest rates to achieve 2% inflation.

*: Despite the prevalence of Wikipedia links in this post, the advice is: Don't rely on Wikipedia. Anyone can edit it and hence put false information in there. Rely instead, if you need to for referencing, on something like the New Palgrave Dictionary of Economics. If you refer to Wikipedia in any assignments you hand in, you'll likely incur the wrath of your tutor!