Typography

Does a lowering of a central bank's interest rates create inflation or deflation? Dubbed the ' Sign Wars ' by Nick Rowe, this has been a recurring debate in the economics blogosphere since at least as far back as 2010. The conventional view of interest rate policy is that if a central bank keeps its interest rate too low, the inflation rate will steadily spiral higher. Imagine a cylinder resting on a flat plane. Tilt the plane in one direction —a motif to explain a change in interest rates—and the cylinder, or the price level, will perpetually roll in the opposite direction, at least until the plane's tilt (i.e. the interest rate) has been shifted enough in a compensatory way to halt the cylinder's roll. Without a counter-balancing shift, we get hyperinflation in one direction, or hyperdeflation in the other. The heretical view, dubbed the Neo-Fisherian view by Noah Smith (and having nothing to do with Irving Fisher), is that in response to a tilt in the plane, the...

Lars Christensen's excellent post about the necessity of having a monetary constitution includes an interesting point about central bank independence: We want central banks to stop the ad hoc’ism. In fact we don’t even like independent central banks – as we don’t want to give them the opportunity to mess up things. Central bank independence has become the standard approach to structuring the nexus between government service-provider and central bank liquidity-provider over the last fifty years. I think a degree of independence makes a lot of sense. Running a monopoly clearing house (which is really what a central bank is) while simultaneously operating other businesses and charities (which is what a government does) presents a tremendous conflict of interest. For instance, imagine that General Electric was granted a monopoly to operate the U.S. clearing system. Wouldn't we worry that GE might use that clearing system to support its appliance or turbine manufacturing businesses...

Hjalmar Schact and Montague Norman  If you were in charge of a central bank during hyperinflation, what would you do to stop it? Here's a brief but detailed account of how the German hyperinflation was halted in November 1923. What is so unusual about the end to the German hyperinflation was its suddenness. Within days of a series of monetary reforms implemented in mid November 1923, price rises came to a dead stop. You have to put this into context to properly appreciate it. A loaf of bread, which cost 30,000 marks on August 30, 1923, rose to 300,000 by mid-September, fifteen million marks by mid-October, and 165 billion marks by early November. And suddenly it stabilized. There were two not-entirely unrelated reforms implemented that month that halted the inflation: 1. the creation of a new unit of account called the rentenmark. 2. the stabilization of the existing unit of account, the paper mark. The Rentenmark With the Reichsbank's paper marks having lost all credibility, i...