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GSB students in Anil Kashyap’s class in "Understanding Central Banks" got a first-hand look at how countries target inflation. Paul Tucker, executive director of the Bank of England and a member of the bank's Monetary Policy Committee, addressed the class at Gleacher Center on May 25.
Tucker, who came to Chicago specifically to speak to Kashyap’s class, helped illustrate why central banks are the single most important agents operating in financial markets. In his remarks, he explained the Bank of England’s Monetary Policy Committee has been able to deliver stable inflation by creating an annual target of two percent and by communicating its objectives to businesses and households.
“The two threads are intertwined,” he said. “We have a better chance of keeping inflation expectation anchored to the target, if the target is simple to communicate and if we do not over-elaborate or slip into being overly ambitious about our conduct of cyclical policy.”
Simply because the MPC no longer neglects the inflationary consequences of excess demand does not mean it can easily “fine-tune” demand to ensure uninterrupted growth, Tucker said. “First, we just do not know enough about the underlying structure and properties of the economy,” he said. “Second, the data we use gives us an unavoidably imperfect read on what is going on.”
Instead, the MPC can “rough-tune” to keep aggregate demand and supply broadly in line as a condition for maintaining stable inflation, Tucker said. “But that does not mean that we can always smooth out quarter-to-quarter or even year-to-year fluctuations in demand and output to the extent some commentary implies,” he said. “In terms of the political economy of monetary policy making, it is important for the central banking community to get that across and accepted.”
Tucker’s remarks echoed the message Kashyap, Edward Eagle Brown Professor of Economics and Finance, makes about the power of central banks. As Kashyap reminds students, Allan Greenspan became a household name because the Federal Reserve Board influences the economy so greatly.
Kashyap also feels strongly that a global focus is key when studying central banks. He devotes several weeks in the course to studying the Bank of England, the Bank of Japan, the Central Bank of Brazil, the Argentine central bank and the People’s Bank of China. To supplement coursework, Kashyap also recruited Jose De Gregorio, Deputy Governor of the Central Bank of Chile to make a special trip to talk to students.
Read a copy of Paul Tucker’s remarks to Professor Kashyap’s class on “Understanding Central Banks.”