Charles Goodhart

A History Of The Federal Reserve

Allan H. Meltzers critically acclaimed history of the Federal Reserve is the most ambitious, most intensive, and most revealing investigation of the subject ever conducted. Its first volume, published to widespread critical acclaim, spanned the period from the institutions founding in 1913 to the restoration of its independence in 1951. Book 1 of the two-part second volume chronicles the evolution and development of the Federal Reserve from the Federal Reserve Accord in 1951 to the first phase of the Great Inflation in the 1960s, revealing the inner workings of the Fed during a period of rapid and extensive change. Book 2 chronicles the evolution and development of the Federal Reserve from the Nixon administration to the mid-1980s, when the Great Inflation ended.

High frequency data in financial markets: Issues and applications☆

Abstract The development of high frequency data bases allows for empirical investigations of a wide range of issues in the financial markets. In this paper, we set out some of the many important issues connected with the use, analysis, and application of high-frequency data sets. These include the effects of market structure on the availability and interpretation of the data, methodological issues such as the treatment of time, the effects of intra-day seasonals, and the effects of time-varying volatility, and the information content of various market data. We also address using high frequency data to determine the linkages between markets and to determine the applicability of temporal trading rules. The paper concludes with a discussion of the issues for future research.

The two concepts of money: implications for the analysis of optimal currency areas

Abstract Much of the economic analysis of moving to EMU has been undertaken within the context of the Optimal Currency Area paradigm. This is the spatial/geographic counterpart of the currently dominating model of the nature and evolution of money, here termed M theory, whereby money is viewed as having developed from a private sector cost minimisation process to facilitate trading. Here, I argue, first, that there is a second, cartalist, or C theory alternative, which is empirically more compelling. Second, I claim that this approach can predict observed relationships between sovereign countries and their currencies better than the OCA model.

The Foreign Exchange Market: A Random Walk with a Dragging Anchor

This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of either short-term overshooting or of longer-term reversion to an equilibrium. The forward exchange rate contains virtually no information on future spot rates. Discussions with practitioners indicate that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models. The interplay between speculation based on fundamentals, and on a random walk, or Chartist, approach, influences the outcome. This endorses the prior model of J. A. Frankel and K. A. Froot. Copyright 1988 by The London School of Economics and Political Science.

The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior

This paper studies the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. By using data sampled at a five-minute frequency, we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post-announcement, although the significance of these effects decreases rapidly as the interval over which the post-announcement change in exchange rates is increased. The direction of the exchange rate response conforms, in general, with a reaction function interpretation whereby reactions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets. Further, we detect influences of German monetary policy decisions on the reaction of the exchange rate, and also differences between U.S. and German announcements in the exchange rate reaction time pattern.

Every minute counts in financial markets

Abstract This paper represents an introductory study of ultra high frequency, minuute-by-minute data, for forex spot rates (bid-ask Reuters quotes) on three days, Autumn 1987. The frequency of price revision, size of spread, and statistical characteristics are measured. The series exhibit (time varying) leptokurtosis, unit roots, and first-order negative correlation, the latter especially in disturbed ‘jumpy’ markets. The effect of time aggregation on these characteristics is examined, and variance ratios are analyzed. Multivariate analysis revealed significant relationships between lagged exchange rates, both the own rate and the key deutsche mark/US dollar rate, and the current spot rate.

An academic response to Basel II

It is our view that the Basel Committee of Banking Supervision, in its Basel II proposals, has failed to address many of the key deficiencies of the global financial regulatory system and even created the potential for new sources of instability. This document highlights our concerns that the failure of the proposals to address key issues can have destabilising effects and thus harm the global financial system. In particular, there is considerable scope for under-estimation of financial risk, which may lead to complacency on the part of policy makers and insufficient understanding of the likelihood of a systematic crisis. Furthermore, it is unfortunate that the Basel Committee has not considered how financial institutions will react to the new regulations. Of special concern is how the proposed regulations would induce the harmonisation of investment decisions during the crises with the consequence of destabilising rather than stabilising the global financial system.

Establishing a central bank : issues in Europe and lessons from the US

List of figures List of tables Preface List of conference participants 1. Introduction Part I. The Design of a Central Bank: 2. Designing a central bank for Europe: a cautionary tale from the early years of the federal reserve system 3. The European Central Bank: reshaping monetary politics in Europe 4. The ECB: a bank or a monetary policy rule? Part II. Transition from National Central Banks To A European Central Bank: 5. Hard-ERM, hard ECU and European Monetary Union 6. Voting

A Model of the Lender of Last Resort

This paper develops a model of the lender of last resort. It provides an analytical basis for “too big too fail” and a rationale for “constructive ambiguity”. Key results are that if contagion (moral hazard) is the main concern, the Central Bank (CB) will have an excessive (little) incentive to rescue banks and the resulting equilibrium risk level is high (low). When both contagion and moral hazard are jointly analyzed, the CB’s incentives to rescue are only slightly weaker than with contagion alone. The CB’s optimal policy may be non-monotonic in bank size.

Price Stability and Financial Fragility

If asked to provide a practical, quantitative definition of price stability, most people would offer something like a rate of increase in the RPI, or the GDP deflator, of 0–2 percent. This is the kind of numerical objective which those Central Banks with a direct inflation target, e.g. New Zealand and Canada, are aiming to achieve. While I have great sympathy for such an approach, I want to start by arguing that the standard measures of inflation used in such targets may be incorrect, at least in principle. Such measures concentrate on current service flow prices, and ignore future service flow prices, changes in which are indicated by changing interest rates and asset prices. This thesis was cogently argued by Alchian and Klein in a paper in 1973; they put the case so well then, that I felt that I could do no better than repeat it. So, much of Section II consists of selections from their earlier work.