The Use and Abuse of Monetary History
The Federal Reserve and the European Central Bank have been invoking specific historical analogies to defend their monetary-policy approaches. But, in appealing to events that are seared into popular consciousness, officials often fail to test their analogies' "fitness" with current conditions, leading to serious policy distortions.
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BERKELEY – Imagine two central banks. One is hyperactive, responding aggressively to events. While it certainly cannot be accused of ignoring current developments, its policies are widely criticized as storing up problems for the future.
The other central bank is unflappable. It remains calm in the face of events, seeking at all cost to avoid doing anything that might be construed as encouraging excessive risk-taking or creating even a whiff of inflation.
What I have just described is no mere hypothetical, of course. It is, in fact, a capsule depiction of the United States Federal Reserve and the European Central Bank.
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