Panel on Monetary Policy

Paul Jenkins (Senior Deputy Governor, Bank of Canada)Frederic Mishkin (Governor, Federal Reserve Board)David Laidler (University of Western Ontario)Marc Giannoni (Columbia University)

Moderator:  Daniel Racette (HEC Montréal)

The functions money

• As specified in as good a textbook as Money, Banking and Financial Markets (Mishkin, 2007, pp. 50-52), money is :

1. A medium of exchange

2. A unit of account (numéraire)

3. A store of value

• Historically, it has been much better in its first function than in the other two !

Measuring with an elastic

• It wouldn’t come to anybody’s sound mind to use a rubber or elastic tape to build his/her house…

• … since the results would most probably be disastrous…

The Meter as a solution

• In France in the 1780’s, dozens of units of measurements existed with hundreds of local values… making the progress towards industrialization very difficult !

• «By the end of 1790, the Academy had placed the matter in the hands of as illustrious a scientific commission as has ever existed: Lagrange, Laplace, Borda, Monge, and Condorcet.» – Source : http://www.sizes.com/units/meter.htm

• They came up with the “meter” as the solution !

Precision, precision !

• On March 19, 1791, the meter (from the greek «μέτρον», measure) was defined as «one ten-millionth of the distance at sea level from the pole to the equator.» (for the American audience, 3 feet and 11.44 lines), a measure based on nature in the spirit of Rousseau. http://www.sizes.com/units/meter.htm

• It was quite an achievement to come up with the exact measure, given the instruments available at the time !

«The» METER of Paris :Communicating the results !

• Installed in 1796 at the corner of Vaugirard and Garancière Streets in the 6th «arrondissement». – http://aviatechno.free.fr/unites/metre_etalon.php

Accuracy established through 17 international conferences !

• For instance :– «On 1960 October 20, the eleventh General

Conference on Weights and Measures defined the length to be equal to 1,650,763.73 wavelengths in vacuum of the radiation corresponding to the transition between the 2p10 and 5d5 quantum levels of the krypton-86 atom.

– «On 1983 October 21, the seventeenth CGPM defined the length as equal to the distance travelled by light in vacuum during a time interval of 1/299 792 458 of a second.»

• Have I heard «Fine Tuning» ???

The measure of prices

• But why would we allow ourselves less accuracy when it comes to the measurement of something as important as the price of goods…

• …which makes comparisons over time (even for relatively short periods of time) difficult or even impossible ?

• As I will show shortly, History has surely taught us that money had to be solidly anchored.

The Money «Standards»

• If David allows me a short cut through history, we can summarize that money went through three important standards :– The «Gold Standard» (?-1913)– The «Gold Exchange Standard» (1946-1971)– No standards at all (1971-1991)

• And, now, we’ve come up with :– The «Goods Standard» (price or inflation targeting

in a growing number of countries)

What’s in a picture ?

• Since a picture is worth a thousand words, let’s see what were the results of the three first standards leaving the analysis of the specifics of the «goods standard» to today’s panel participants.– Source of the graph : David H. Fischer «The

Great Wave», Oxford University Press, 1996, p. 4

The «Goods Standard»

• As will be shown by the participants in the panel, we are now close to an accurate standard that has made money a relatively adequate unit of account and store of value in the last two decades.

• What will now happen is that we will have conferences over the next 200 years to fine tune the «Goods Standard» details : choice of adequate price index, targeting inflation or the price level, etc…

An anchor as the meter

• We never know : By that time, the U.S. may have adopted price targeting… and the metric system !

• But, whatever happens, we need an anchor that functions well, accurately and that delivers stability in all respects through time… as much as technically feasible !

• Eventually, through our research, money may become as precise and reliable for measuring prices through time as the meter has been for measuring length !

Panel on Monetary Policy

Paul Jenkins (Senior Deputy Governor, Bank of Canada)Frederic Mishkin (Governor, Federal Reserve Board)David Laidler (University of Western Ontario)Marc Giannoni (Columbia University)

Moderator:  Daniel Racette (HEC Montréal)