Why Central Banks (and Money) Rule the Roost
Some have argued that a significant decrease in the demand for money, due to financial innovations, could imply that central banks are unable to implement effective monetary policies. This paper argues that central banks are always able to influence the economy's interest rates, because their liability is the economy's unit of account. In this sense, central banks "rule the roost." In the 1930s, starting from Keynes's ideas and referring to money in general, Kaldor had followed a similar line of analysis. In principle, a new unit of account could displace conventional money and, hence, central banks. But this process meets relevant obstacles, which essentially derive from the externalities and network effects that characterize money. Money is a "social relation." Money and central banks are the outcome of complex social and economic processes. Their displacement will occur through equally complex processes, rather than through mere innovation.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Friedman, Benjamin M, 1999. "The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps?," International Finance, Wiley Blackwell, vol. 2(3), pages 321-338, November.
- David Laidler, 2004. "Central Banks as Lenders of Last Resort - Trendy or Passe?," University of Western Ontario, Economic Policy Research Institute Working Papers 20048, University of Western Ontario, Economic Policy Research Institute.
- Goodhart, Charles A E, 2000. "Can Central Banking Survive the IT Revolution?," International Finance, Wiley Blackwell, vol. 3(2), pages 189-209, July.
- Charles Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," FMG Special Papers sp125, Financial Markets Group.
- Michael Woodford, 2001.
"Monetary policy in the information economy,"
Proceedings - Economic Policy Symposium - Jackson Hole,
Federal Reserve Bank of Kansas City, pages 297-370.
- Bruce White, 2001. "Central banking: back to the future," Reserve Bank of New Zealand Discussion Paper Series DP2001/05, Reserve Bank of New Zealand.
- Michael Woodford, 2002. "Financial market efficiency and the effectiveness of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 85-94.
- Freedman, Charles, 2000. "Monetary Policy Implementation: Past, Present and Future--Will Electronic Money Lead to the Eventual Demise of Central Banking?," International Finance, Wiley Blackwell, vol. 3(2), pages 211-227, July.
- Benjamin M. Friedman, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," NBER Working Papers 7955, National Bureau of Economic Research, Inc.
- Woodford, Michael, 2000.
"Monetary Policy in a World without Money,"
Wiley Blackwell, vol. 3(2), pages 229-260, July.
- Dow, Sheila C & Smithin, John, 1999. "The Structure of Financial Markets and the 'First Principles' of Monetary Economics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(1), pages 72-90, February.
- Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 0245, European Central Bank.
- L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
- Hicks, J. R., 1975. "Value and Capital: An Inquiry into some Fundamental Principles of Economic Theory," OUP Catalogue, Oxford University Press, edition 2, number 9780198282693.
- Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198287247.
- Bruce White, 2001. "Central Banking: back to the future," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, september.
- Goodhart, Charles A. E., 1998. "The two concepts of money: implications for the analysis of optimal currency areas," European Journal of Political Economy, Elsevier, vol. 14(3), pages 407-432, August.
- Friedman, Benjamin M, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," International Finance, Wiley Blackwell, vol. 3(2), pages 261-272, July.
- Dowd, Kevin & Greenaway, David, 1993. "Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas," Economic Journal, Royal Economic Society, vol. 103(420), pages 1180-1189, September.
- Benjamin M. Friedman, 1999. "The Future of Monetary Policy: The Central Bank as an Army With Only a Signal Corps," NBER Working Papers 7420, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_457. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Celeste Edwards)
If references are entirely missing, you can add them using this form.