Abstract

MASON, J. W.. The real secret of central banking: no masters. Rev.econ.inst. [online]. 2022, vol.24, n.47, pp.203-212.  Epub Jan 20, 2023. ISSN 0124-5996.  https://doi.org/10.18601/01245996.v24n47.09.

The debate over the power of central banking to control inflation and stabilize the business cycle has recently been reopened. This brief argues that monetary policy works by changing the disposition of banks rather than by altering the interest rate, and that there are no central banking "masters" who know the secret of maintaining full employment and price stability. Interest rate pass-through does not work as the textbooks assume. Empirical evidence shows that the Fed's interest rate does not affect long-term interest rates, and that business investment depends on credit conditions and not so much on the cost of loanable funds. In the real world, there are no markets in which you exchange today's goods for tomorrow's goods; there are credit markets. The interest rate does not measure the relative price of present consumption versus future consumption, but the trade-off between income versus liquidity and security.

Keywords : central banking; monetary policy; interest rate; JEL: E31 E52.

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