25 July 2022

The Money Minders

Jagjit S Chadha
2022, Cambridge University Press, 250 pages,
ISBN 9781108971812

Reviewer: Dame Kate Barker, British Coal Staff Superannuation Scheme

This is an excellent and engaging account of monetary policy – its historic development, successes and frequent shortcomings.  It is, as will be seen in this review, very quotable.  Starting with an account of why money matters so much to society, we are taken through a number of historic examples of the use of money including Newton’s difficulties in the early 18th century with the relative prices of gold and silver.  Money is both vital to, and reflective of, social conditions.   In the course of developing this argument, we learn incidental facts such as the origin of the ‘slate was wiped clean’ – the literal wiping away on the clay when a contract was settled.  

In giving a brief outline of the following chapters, it is hard to do justice to Chadha’s insights, or to his quirky and engaging style.  He draws the reader in by taking you with him on a journey of discovery and inquiry.  The history of the Bank of England’s role in dealing with crises is set out; along with a quote from Bagehot about how the lender of last resort should operate that has echoes right through to the Global Financial Crisis (GFC).  The account of the Great Depression is illuminated by a lucid account of the IS-LM framework, and Chadha suggests the inter-war recessions were driven by shifts in the LM curve – just as you are being convinced he adds ‘allow me to argue with these, my own, results’.  

Describing the period post WWII, although Chadha clearly agrees with the view that policymakers should seek to keep demand going, he is critical of the attempts to achieve too much fine-tuning.   Some of the sentiment is summed up in the comment: “The mixture of institutional detail, high theory, data, and, at times, low politics, can make monetary policy analysis a daunting mix for practitioner, instructor and student alike’.  He first describes attempts to manage the economy towards the ‘Bliss Point’ and then the many changes resulting from a recognition of the role of expectations.  The role (or not) of the Phillips curve and the contributions of Brainard about operating policy under uncertainty are also key themes.  Finally the rather awkward blow of the Lucas critique is explained, with its difficult implications for the use of historic models.

As is familiar, ahead of the GFC, there were expressions of confidence that improved monetary policy techniques had reduced the risk of recession – price stability being wrongly viewed as a sufficient statistic to judge macroeconomic equilibrium.  Chadha discusses how financial regulation, fiscal policy and also monetary policy abroad now all seem more intertwined with domestic monetary policy.  As one of those surprised by the ‘collapse of the separation principle’

I agree with the diagnosis that there was too much reliance on a model of the economy which had an insufficient role for asset prices (and too much of a tendency to assume we could estimate both the natural rates of interest and the output gap).  There was also some self-congratulation about success in keeping inflation and inflation expectations of track - ignoring the role of import price reductions for manufactured goods from emerging market economies.  We thought this was the end of the UK’s hunt for a nominal anchor, but it proved a chimera.  

Chadha gives a thorough account of how monetary policy thinking developed – including the debate about whether interest rates or money quantities should be used to manage inflation.  There is also a discussion of QE and its uncertain effects, and of the rationale behind the creation of the Financial Policy Committee.  Here I very much support the contention that at present it is not clear how monetary policy and the new(ish) macro-prudential instruments will relate to each other.  We may need cooperation to bring the economy to the optimal position.  

There are two Epilogues – the first of which discusses forecasting – an activity justified as enabling us to outline and plan for consistent futures.  In passing it is suggested that a focus more on big, and not small, risks might be a wise policy approach even if it led to short-term modest economic volatility.  This should be a more prominent approach and this is a key contribution to the monetary policy debate.  

The second epilogue discusses the role of monetary policy and its relation to fiscal policy during the Covid pandemic.  Both negative interest rates and yield curve control are picked out as possible ways forward.  Chadha concludes with two important thoughts – that the central bank should retreat from being the only game in town (its balance sheet should not be the answer to financing infrastructure and/or greening the economy) and that it is now time for an external review of the Bank’s Remit and Objectives.  That seems a well-judged suggestion after over a decade in which the role of the Bank has developed in response to particular crises rather than following some systematic evaluation.

The range of topics and depth of insight in this relatively short book makes a refreshing change from the more frequent books which are long on pages and short on insight.  It is also very nicely produced.  There are two big themes which came across to me.  First, central banks inevitably have to deal with a great deal of uncertainty about the effects of their actions; they know their knowledge is partial.  Secondly – they should stick to their task of maintaining monetary and fiscal stability and leave to politicians the tasks such as managing inequity and considering how much risk should be transferred to future generations. In the course of the book Chadha also argues against the attempt to use central bank ’mystique’.

It is a terrific tribute that in July 2022, as inflation reaches highs unfamiliar to much of the population and senior politicians call the Bank of England’s actions and role into question – reading and re-reading this book would be of immense value to all concerned