The browser you are using is not supported by this website. All versions of Internet Explorer are no longer supported, either by us or Microsoft (read more here: https://www.microsoft.com/en-us/microsoft-365/windows/end-of-ie-support).

Please use a modern browser to fully experience our website, such as the newest versions of Edge, Chrome, Firefox or Safari etc.

Central bank power is a matter of faith

På svenska

Author

Summary, in English

This paper reconsiders how central banks get involved in the process of determining nominal variables such as market interest rates and inflation rates. It is argued that the traditional story deriving central bank power from its monopoly of issuing base money is flawed. That story - in its various guises - is based on the quantity equation. This equation, however, is only applicable in the hypothetical only-cash-world, i.e. in a world where all transactions has to be paid for with central bank issued notes and coins. Nevertheless, the vast majority of economists would agree that, in practice, central banks seem to influence interest and inflation rates. Here, we suggest that the explanation is that central banks have acquired a role as focal point for those variables. It is possible because interest setting is a coordination game, in which agents have to predict each others expectations.

Publishing year

2005

Language

English

Pages

1-18

Publication/Series

Working Papers

Issue

2005:21

Document type

Working paper

Topic

  • Economics

Keywords

  • Central Banking
  • Focal Points
  • inflation
  • Monetary Policy
  • Money
  • Quantity Theory
  • C70
  • E31
  • E42
  • E43
  • E44
  • E51
  • E52
  • E58

Status

Published