A: You’ll find many examples of how to implement some of the strategies that are presented in Take My Monetary Policy, notably “The Role of Bank Policy.” In my opinion, the most useful advice comes when the author explains why he believes (and rightly so) that banks should be prevented from directly influencing how monetary policy is decided. By preventing banks from influencing policy decisions through political connections or other means, the bank can better protect the public from the effects of bank actions. In particular, Take My Monetary Policy makes a good case for why central banks should not be allowed to intervene in the foreign exchange market.
The foreign exchange market is an incredibly complex mechanism. Politicians, businesses, and ordinary citizens all play an important role in making the decisions that affect the value of one nation’s currency against another. When one group is able to influence the exchange rate by using politically Correct means, you can bet that another group will be able to do the same. It doesn’t matter who controls the bank; what matters is that they are allowed to use their power to influence the decision-making process. If the public is allowed to regulate these banks via legal authority, then we can rest assured that the public’s confidence in the currency of the issuing country will be restored.
Take My Monetary Policy does a good job of explaining how this type of intervention works, and how it might be used. One group may believe that a particular interest rate is fair and may demand that the banking system fix it through interest rate manipulation. Another group might believe that a certain currency is overvalued because it is fixed, and thus should be allowed to depreciate instead of increasing. Still another group might be concerned about excessive international capital flows, excessive asset seizures, and the like-such things that might justify a government policy to intervene in the economic system.
The way that such a policy might be implemented would depend on the goals of the bank. For example, it might attempt to stabilize a currency through interest rate manipulation, interest rate fixing, or even structural changes in the banking system. These sorts of interventions, when done well, should yield good long-term benefits. However, if a bank is manipulating the interest rate just to get more deposits, then this sort of intervention may not be very lasting. It might cause a few days’ lag in the global economy, but it will eventually be felt.
As mentioned earlier, some central banks resort to currency speculations, which can have disastrous effects if they are allowed to continue for too long. A prime example of this is the Bank of Japan, which has been buying up many Japanese Yen with the expectation of selling it in the U.S. at a higher price in coming years. The speculations, which are meant to yield short-term benefit, have cost the country a lot of money. The Bank of Japan eventually realizes that it made a mistake when it tried to intervene in the foreign exchange market, because doing so could have cost too much for the economy.
Whether the purpose of these interventions is to stabilize a currency or to try to gain investment, a good strategy is to have a plan before making the intervention. The plan should determine why the bank is taking the measure, who it is targeting, the kind of loss the target currency faces, and how the target currency can be regained. All these factors play a role in determining whether I take my monetary policy from one central bank to another, or whether I should allow the free market to decide which currencies should be accepted in international settlements.
Of course, all these things depend on the overall performance of the banking system and its capacity to conduct economic business. Central banks can play a very important role in stabilizing the money supply, and they can also facilitate monetary flows when necessary. But they should never act like a magic wand that granting instant happiness to everyone.