The Influence of Central Banks Today
The role of the central banks has been changing greatly in the past decade. Whether this is good or bad remains to be seen.
The last decade has seen a rise in the power and influence of central bankers. Years of high inflation have led to the view that politicians can no longer be trusted with monetary policy. One by one, central banks have become independent, culminating in the formation of the European Central Bank.
Inflation in advanced industrial countries was down to about 1.5% at the start of the millennium, its lowest rate since the 1950s. Investing of the money is the factor. However, many governments are now concerned at the cost in growth and unemployment. Low inflation does not necessarily mean low growth and high unemployment.
If a key role of central banks to combat inflation, this raises the question — how do we measure it? There is, for example consumer inflation and industrial inflation. In particular, price indices do not usually include the prices of financial assets like shares. The collapse of these asset prices could also lead to economic and natural instability as in Japan. In 1911, Irving Fisher, the economist, argued that a price index should include share in property prices. Joseph Carson, an economist at Deutsche Bank, New York has constructed such an index or shares in at 5%. Leading indices, such as the Dow, the Footsie and — most notably — NASDAQ, surge between 1996 and 1999 at a rate not seen since the late 1980s and people talked of the new economy and a new paradigm.
Since the highs of the end of 1999, the Dow has lost around 30% and the Footsie over 40%, with falls being triggered initially by the burst of the dot.com bubble in Spring 2001, followed by the events of September 11 and by the concerns over the validity of reported results of financial irregularities at Enron, WorldCom and other major corporations. While it is not the role of central banks to maintain stock market growth, the knock on the economic effect of stock market instability is clearly a concern to central bank governors.
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