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Central Banking in Theory and Practice (Lionel Robbins Lectures)
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20 of 21 people found the following review helpful
on January 13, 2000
Nothing fancy, but a good testimony from a real central banker about how real central banking has been carried out in recent US history. It is much less glamorous than all the theories, models and arguments would have it. Logical, sensible and even-tempered, like a central banker. A small book easily read in an evening that brings a lot down to earth. Only four stars because nothing this reasonable deserves five.
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6 of 6 people found the following review helpful
on August 13, 2012
4 stars for title and Amazon description, 5 stars for book itself. I agree with the other reviewers that the author drives an approachable discussion of some of the important factors in central banking, but I have to say that I would recommend those who are interested in the topic with little background read another book first.

I am generally curious about the topic of central banking and after reading various wikipedia and federal reserve pages I wanted a little more detail. The title and description made it seem like this would be the right next step, but the author generally assumes the reader had more in-depth knowledge of the core topics and references terms and theories without describing them. I was able to figure out the gist largely without external reference, but in retrospect I probably would have started with another book on the topic.

Example terms / concepts used without much description: IS/LM model, Tinbergen-Theil framework

If I were to re-title the book, I would probably call it "Blinder's Reflections on Central Banking in Theory and Practice" or something that might more accurately reflect the expected background of the reader.
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8 of 9 people found the following review helpful
on August 3, 2000
After having taken Macroeconomic Theory, Alan Blinder's book was extremely clear and understandable. His comments about Central Banking behavior make wonderful sense as he takes into account both academic and real world theaters. He was especially clairvoyant in his reasoning about why a Central Bank needs to establish credibility. A definite recommendation for those interested in the Federal Reserve and what they do.
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1 of 1 people found the following review helpful
on November 13, 2013
Central Banking in Theory and Practice is a collection of three lectures by former Vice-Chairman of the Federal Reserve Board and current Princeton economist Alan S. Blinder. It's a great overview of central banking, but it assumes a certain familiarity with economics and monetary policy - it's not a layman's book. Still, it's not impenetrable, and readers willing to put in some effort will likely find that they learn something about what is likely one of the most opaque parts of government.
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on January 10, 2011
This short book offers a useful lesson in central banking. No one could deliver it better than Alan S. Blinder. As he notes with unusual immodesty, "there must be relatively few people who have been as deeply immersed in monetary policy from both the academic and central banking side as I have." (That was of course before Ben Bernanke became chairman of the Fed). The author's conviction is that both theory and practice could benefit from greater contact with and greater understanding from the other. So what does academic theory has to offer and how does it contribute to the central banker's toolbox?

First, modern macroeconomics provides a mode of thinking about the future that is known to economists as dynamic programming. The technique uses a lot of equations, but the underlying idea is very simple. At each point in time the central bank must select a plan for now and for the future that will produce the best available time-path for output and inflation. Unless you have thought through your expected future actions, it is impossible to make today's decision rationally. Of course, by the time period t+1 the policymaker will have new information and may wish to correct his or her plan. The idea is not to lock the central bank in a position it will later regret, but to maintain flexibility while making the best use of available information. The underlying rationale is quite intuitive: think about a person tinkering with the thermostat in a hotel room. The probability is that she will overshoot the desired temperature, and will then have to set a new target again, whereas she should have anticipated the curve path followed by the temperature right from the start. This is known to economists as the difference between adaptative and rational expectations. But of course you do not have to be a skilled economist to practice the art of dynamic programming: like an experienced billiard player who does not understand the laws of physics, a skilled practitioner of monetary policy may follow an intertemporally optimal strategy intuitively and informally.

To this practical lesson Alan Blinder adds a second one, identified formally by William Brainard in 1967: when uncertainty is present, it is better to err on the side of caution. Monetary policy operates in an uncertain world. As the author remarks, "we do not know the model, and we do not know the objective function, so we cannot compute the optimal policy rule." Although central bankers "don't have the luxury of ignoring econometric estimates", they cannot put monetary policy in automatic piloting. You cannot replace the central bank by a computer and throw away the key. The author's recommendation is: "use a wide variety of models and don't ever trust any of them too much." The conservative streak that he sees as a requisite for central banking also fits well with the mode of decision by committee. "While serving on the FOMC, the author notes, I was vividly reminded of a few things all of us probably know about committees: that they laboriously aggregate individual preferences; that they need to be led; that they tend to adopt compromise positions on difficult questions; and--perhaps because of all of the above--that they tend to be inertial." But the group nature of FOMC decisions creates what amounts to an internal system of checks and balances: decisionmaking by committee, especially when there is a strong tradition of consensus, makes it very difficult for idiosyncratic views to prevail. There is a rich tradition of optimal decisionmaking design that goes back to Condorcet. Although monetary economics seldom refers to this literature, the author's own hunch is that "on balance, the additional monetary policy inertia imparted by group decisionmaking provides a net benefit to society".

Alan Blinder is also critical of a large body of recent academic research which has, in his view, made insufficient contact with reality. The monetarist school had some basic intuitions right, but wrongly recommended to focus monetary policy on the money supply, precisely at a time when monetary aggregates were becoming more unstable. Targeting the interest rate thus won by default the debate on the choice of monetary instrument. As a former governor of the Bank of Canada put it, "We didn't abandon the monetary aggregates, they abandoned us." Central bankers also had to abandon the Phillips curve that posited a trade-off between inflation and unemployment, but not for the reasons put forth by those who argued that time inconsistency will lead to an inflationary bias. These economists, Blinder argue, are barking at a nonexistent tree, and the inflationary bias is nowhere to be seen. If there is a bias, it is in the strong anti-inflationary stance of most central bankers, who stand out as conservative policymakers. Some of the economists's proposals, such as linking central bankers's pay to performance, are completely unrealistic. In fact, the author notes, "nations and households seem to find simple, practical ways to cope with a wide variety of potential dynamic inconsistencies--ways that bear little resemblance to the solutions suggested by theorists."

The last chapter on central bank independence raises an interesting puzzle. "When you think deeply about the reasons for removing monetary policy decisions from the 'political thicket', you realize that the reasons apply just as well to many other aspects of economic policy--and, indeed, to noneconomic policy as well." Issues of reputation, credibility, and time inconsistency do not provide the answer: based on these arguments, there would be a good case for making foreign policy independent from the executive branch. In a Foreign Affairs essay published in 1997, Alan Blinder argues provocatively that government has become "too political": Washington could learn from independent agencies like the Federal Reserve and, among other things, shift responsibility for tax policy from the politicians to the experts. These views are not reflected on this short essay, which concentrates on monetary policy. But by his tone, the author demonstrates that he is capable of rigorous reasoning allied with original thinking.
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on March 4, 2013
With all the ongoing news about Federal Reserve actions keeping interest rates low and pursuing Quantitative Easing I wanted a book that explained how these mechanisims work. The author has worked both in academia and within the Fed, so is in a great position to combine theory and practice. The book is mostly on practice, about which it explains some interesting points about policy-making and the importance of independence for the successful operation of central banks. I'm still looking for a concise book that deals with the equations, graphs, and calculations.
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on February 27, 2015
I am still wondering how a tiny book can be so deep. Mr. Blinder made a complex set of concepts readable for economics undergraduates and the interested public alike. After reading this book, one may understand very well how monetary policy works -- at least in normal times, although the insights may help to understand some of the policies adopted during the great recession as well.
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on January 15, 2013
I read it with my Masters class. It was my first class for my degree so I am in no way an expert in the field. It was pretty easy to read and very informative. I would suggest it even to non-degree seeking readers.
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on December 14, 2014
Good insight of a central banker. At first the author is a little too academic (what's the point of getting lost in formulas that could be explained qualitatively for the sake of brevity)
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on October 15, 2009
Easy read, gives some insight to one of the former FED staffers. Proves that there is no magic to our money, just gut reaction and formulas. No one really know's what to do
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