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When should policymakers reach for the history books? Some examples from the 20th century

Summary:
Catherine Schenk in BankUnderground blog: Since the Great Financial Crisis started in 2007 there has been renewed interest in using the past as a basis for policy responses in the present, but how useful is history and how is it best used? Certainly, the old chestnut that ‘those who neglect the past are sure to repeat it’ is a valid warning, but how to select the appropriate historical examples and draw the right lessons is a more nuanced exercise that is explored in this post. Galbraith (1990): ‘the extreme brevity of the financial memory’ makes financial markets susceptible to unstable euphoria. Greenspan (1997): ‘regrettably, history is strewn with visions of such ‘new eras’ that, in the end, have proven to be a mirage. In short, history counsels caution’. Macmillan (2008): ‘the

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Catherine Schenk in BankUnderground blog:

Since the Great Financial Crisis started in 2007 there has been renewed interest in using the past as a basis for policy responses in the present, but how useful is history and how is it best used? Certainly, the old chestnut that ‘those who neglect the past are sure to repeat it’ is a valid warning, but how to select the appropriate historical examples and draw the right lessons is a more nuanced exercise that is explored in this post.

    • Galbraith (1990): ‘the extreme brevity of the financial memory’ makes financial markets susceptible to unstable euphoria.
    • Greenspan (1997): ‘regrettably, history is strewn with visions of such ‘new eras’ that, in the end, have proven to be a mirage. In short, history counsels caution’.
    • Macmillan (2008): ‘the past can be used for almost anything you want to do in the present’.
    • Bernanke et al (2019): ‘Financial crises recur in part because memories fade’.

Perhaps we need to think beyond just crises when we consider how history can be helpful to central bankers. The essence of economic history is to highlight the importance of institutions and the political and social context of economic outcomes. Knowing about how policies were developed in the past can enhance our understanding of the changing context of policy implementation. To do this, uncovering in the archives the options that were rejected might be as important as assessing the impact of policies that were adopted. More broadly, historical case studies can be used as a training ground for central bank staff and broaden their conceptual or theoretical imagination by challenging current ideas of what central banks are for and what their priorities should be. This may become increasingly important as the central banking orthodoxy from the past 30 years begins to break down.

Central banks will need flexible minds to face future challenges. Finally, of course, economic historians create long-term data sets to provide the raw material to test and inform shifts in economic policy. The Bank’s Millenium of Macroeconomic Data is a good example of this. In 2009 at age 94, Paul Samuelson’s advice to economists was ‘Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come’.

Catherine lists several books which point to lessons for today. In the end:

In sum, history provides a playground for policymakers to apply data or scenarios to their policymaking and to provide inspiration for thinking outside the box. But the pursuit of lessons from economic history must be carefully calibrated to the underpinning institutional setting – this nuance calls for greater collaboration between economic historians and central bankers.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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