The latest monograph published by the Institute of Economic Affairs, "Money, Inflation and the Constitutional Position of the Central Bank" by Professors Milton Friedman, Charles Goodhart and Geoffrey Wood, contains important insights into the causes and consequences of inflation and the ideal relationship between central banks and governments.
The monograph includes two previously published papers by Milton Friedman, which were instrumental in changing the attitude of policymakers, journalists and academics, towards inflation, its causes and its consequences. New insights are added in the paper by Charles Goodhart, Special Adviser to the Governor of the Bank of England.
He argues that there is no loss of democratic legitimacy from an independent central bank controlling monetary policy, as long as there is a single measurable objective that of controlling inflation. Goodhart writes, Hence accountability and viability are enhanced. There are no trade-offs; no discretionary judgments between competing objectives...here is no democratic deficit either. Indeed, the public accountability of monetary policy has been greater in this country since 1997, when the incoming Labour government changed the regime".
Goodhart also points out that any short-term conflict that might exist between inflation and unemployment can be thrown back into the political arena through the "exchange of letters" necessary when inflation is off-target.
Goodhart rejects the idea that the MPC should be "more representative" in its make-up. On the whole, controlling inflation is a technical process and the decisions should be technical. However, there are important debates to be resolved regarding precisely how the Bank of England should be accountable to Parliament.
Professor Geoffrey Wood of Sir John Cass Business School, City University ties the work of the other authors to the thinking of the new Governor of the Bank of England, Mervyn King. In particular, it is important to remember that, whilst central banks do not necessarily control the money supply directly, it is excessive monetary growth and not "cost pressures" or "lack of competition" that cause inflation. It is important that we do not have to relearn that lesson!