Published by EH.Net (February 2018)

Pierre L. Siklos, Central Banks into the Breach: From Triumph to Crisis and the Road Ahead. New York: Oxford University Press, 2017. xviii + 324 pp. $45 (hardcover), ISBN: 978-0-19-022883-5.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

Central bankers used to know what they were supposed to do and how to do it. Now they know neither, and whether they will ever know again is uncertain. However, they keep trying, with apparently undiminished self-confidence, in the hope that economic relations will settle into a “new normal.” Hence the title of the book under review.

The book begins (chapter 1, “Moderation before the Storm”) with conditions prior to the Great Financial Crisis of 2008 (the Great Moderation) when central banks had developed simple inflation targeting or Taylor Rule policies, and the virtues of independence were generally accepted. This simple state was disrupted by the Great Financial Crisis, which added financial stability along with asset prices and credit to the objects of concern, brought central bank balance sheets to the fore, and questioned the value of independence.

Chapter 2 (“When Finance and the Real Economy Collide”) points out that the former monetary policy goals (inflation and sometimes its trade-off with GDP) were considered separable from financial stability and enabled the myopia of central bankers. The Great Financial Crisis made this approach unacceptable. More complicated models were required. Of course (chapter 3), political constraints, such as pressures for easy money, are also important. Chapter 4 (“The Decline of Simplicity and the Rise of Unorthodoxy”) considers the increased complexity of central bank problems, and also of their models, which, however, have not kept up. Words have become increasingly important as a policy tool as formal models have become less helpful, although broken promises have reduced central bank credibility and transparency has been relegated to the “scrapbook of history.” Chapter 5 (“The Overburdened Central Bank and the Shift from Autonomy”) describes how the goals (responsibilities) of central banks have passed their understanding (and models). They have become more accountable and less trusted. The last chapters (“Disquiet on All Fronts?” and “Trust but Verify”) summarize the present, which has followed from officials’ growing responsibility for complex goals (including financial stability) without a corresponding growth in capabilities.

The book is a useful accompaniment to central banker statements and decisions. Focusing on the Federal Reserve, Janet Yellen and her colleagues clearly do not know what they are doing. They think they ought to have a rule — like pre-2008 — but do not. Their former “dual mandate” or “Taylor rule” is inoperable, not to mention the addition of “financial stability.” Interest rates used to (“normally”?) rise significantly during expansions but inflation is below target. So what to do? They lack a reason (rule) to raise rates, but they feel like they should, although as often as not they fail to keep their promises.

The only qualification I would make to Siklos’ contribution is that he overstates the novelty of recent central bank difficulties. Misreading (or not understanding) the present is the rule, not the exception, as are its adverse impacts on financial and economic stability, such as the Great Depression and the inflation of the 1970s, not to mention the growing inflation of the 1960s. The notion that the 1951 Accord gave the Fed independence to pursue price stability is a fiction. The GDP deflator is almost eight times its value at that time; it rose more than fifty percent during Federal Reserve chair Martin’s tenure (1951-70). In comparison, the price level was about the same in 1930 as in 1830. Central banks since the end of the gold standard constraint have not been kind to investors seeking real returns.

John H. Wood ( is author of A History of Central Banking in Great Britain and the United States (Cambridge University Press 2005) and Central Banking in a Democracy: The Federal Reserve and its Alternatives (Routledge 2015). He is currently working on the effects (or lack thereof) of legislation on markets during the tenures of William McChesney Martin, Jr. as president of the New York Stock Exchange (1938-41) and chairman of the Federal Reserve Board (1951-70).

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