Monetary History, Exchange Rates and Financial Markets: Essays in Honour of Charles Goodhart, Volume Two

Published by EH.NET (March 2004)

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Paul Mizen, editor, Monetary History, Exchange Rates and Financial Markets: Essays in Honour of Charles Goodhart, Volume Two. Cheltenham, UK: Edward Elgar, 2003. xi + 281 pp. $95 (cloth), ISBN: 1-84376-086-X.

Reviewed for EH.NET by Lars Jonung, DG ECFIN, European Commission.

In November 2001 the Bank of England arranged a two-day festschrift conference to honor Charles Goodhart — his dual career as a distinguished monetary economist and as a prominent central banker. The proceedings of the conference are now published in two volumes, the first one focusing on the theory and practice of central banking, the second one on monetary history, exchange rate arrangements and the regulation of financial markets. For researchers in economic history, the second volume is the more interesting one — although the first one contains much about the evolution of central banking in recent decades.

As a rule, to review a festschrift is similar to the task of reviewing a smorgasbord for a culinary magazine: there are many but disparate dishes to consider. Often the festschrift is composed of a set of chapters lacking a unifying theme, except being devoted to the scholar honored by the festschrift, and held together mainly by a common binding.

This is not the case of Monetary History, Exchange Rates and Financial Markets. It is well organized according to fields to which Charles Goodhart has made significant contributions. And these fields are many as he is “the Samuel Johnson of monetary policy” according to one of the participants of the conference.

Virtually all of the contributors start out from the work of Goodhart. Then the trip takes off in one of two directions: either his work is taken as a source of inspiration and pushed further, or it is scrutinized in a way that may surprise readers, steeped in the continental European tradition that the task of the festschrift is to heap praise on someone who is taking the great step out of academia and into retirement. But the criticism — all given by Americans (who else?) — pays tribute to Goodhart. His work stimulates response and rebuttal. These chapters challenge his views and interpretations and in so doing, raise the academic standard of the volume far above that of the orthodox festschrift.

In the first chapter (“The Role of History of Economic Thought in Modern Macroeconomics”) David Laidler starts by complimenting Goodhart for not being a “modern macroeconomist,” as that species lacks the proper understanding of the history of economic ideas. Laidler makes a strong case for his choice of accolade, demonstrating how a number of prominent “modern” economists are misjudging or misusing economic thought and historical evidence. Today the prevalent use of models and techniques has reduced the pay-off of drawing on history — the history of the economy as well as of economic thought. The question remains: which are the driving forces behind this evolution? One guess is that many of the fashionable macro-models are ill-suited for empirical testing or do not stand out as worthy explanations of historical events. So the easy way out is to turn away from the past.

The second chapter by Michael Bordo and Anna Schwartz (“Charles Goodhart’s Contributions to the History of Monetary Institutions”) is an account of Goodhart’s analysis of the evolution of central and commercial banking. They pay great respect to his work, but object to his opinion that “markets fail more readily than … policy-makers and regulators.”

In chapter 3 (“Crises Now and Then: What Lessons from the Last Era of Financial Globalization?”) Barry Eichengreen and Michael Bordo start from Goodhart’s comparison of the recent Asian financial crisis and the banking and currency crises during the classical gold standard, arguing that his view is “too simple.” Bordo and Eichengreen base their conclusions on an impressive number of calculations of the output loss and recovery time from crises under various monetary regimes. I advise those who want to sort out the arguments to consult footnote 51 – the longest one in the volume. Here the problems associated with estimating the output losses caused by crises are summarized in a concise way.

In chapter 4 (“Exchange Rate Regimes in Theory and Practice”), Andrew Crockett reviews the current literature on the choice of exchange rate regime. He is not quite happy with the mainstream view that the world is moving towards a bipolar case: viable and sustainable exchange rate regimes are found either among monetary unions or in fully floating exchange rates cum inflation targeting. He finds it a bit too simplistic — at the end offering no alternative interpretation but some common sense qualifications.

The next three chapters are inspired by Goodhart’s work on foreign exchange markets and the microstructure of foreign exchange trading. Takatoshi Ito (“Is Foreign Exchange Intervention Effective? The Japanese Experiences in the 1990s”) presents quantitative estimates of the Japanese intervention policy. This premier study — Ito was the first to get the data — shows convincingly that the interventions have been a highly profitable venture.

Mintao Fan and Richard Lyons (“Customer Trades and Extreme Events in Foreign Exchange”) and Richard Payne (“Trading Activity, Volatility, and Transactions Costs in Spot FX Markets”) push the work of Goodhart further by using new sets of high frequency data from the exchange markets. They all stress the importance of orders flowing from the final customers. These customer orders represent the catalyst behind exchange rate movements.

The three last contributions deal with financial regulation. Surveying both the theory and the empirical record for Europe, Japan, the U.S. and Canada, Elena Carletti and Philipp Hartmann (“Competition and Stability: What’s Special about Banking?”) reject the idea that competition is a threat to stability in the commercial banking sector.

Inspired by Goodhart’s work on financial supervision, Andrew Sheng and Tan Gaik Looi (“Is There a Goodhart’s Law in Financial Regulation?”) test the application of Goodhart’s law to financial regulation and find it most helpful. Their chapter also contains an annex setting out Goodhart’s policy conclusions on regulation. The final contribution by Michael Foot (“Working with Market Forces”) is a most sensible plea for financial regulation to be based on a market-oriented approach.

The editor has succeeded nicely in the difficult task of organizing the festschrift in a constructive way. The selection of commentators contributes to that. The volume ends with some comments by Charles Goodhart. I wish he could have been given more of an opportunity to respond — now it is being done indirectly through the commentators serving as his medium. All in all, I expect this festschrift to have a half-life much longer than the average one. It deserves it.

Lars Jonung is presently co-editing a volume on the internalization of asset ownership in Europe, forthcoming from Cambridge University Press. In 2003 he published The Demand for Money with Michael D. Bordo, as well as an anthology on the Swedish record of inflation targeting, 1993-2003 (in Swedish).

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