Collapse of Bretton

Woods

16
14 25
14 End of the Collapse
volcker 12 Stage III
12 20 of Bretton
stabilisation of
Woods
10 EMU
10
begins 15
8 8
6 10
6
4
4 Collapse
2 5
of Bretton
2 Woods
0
0
–2
1970 1980 1990 2000 1975 1980 1985 1990 1995 1970 1980 1990 2000
2000 2005 Japan
Floating of United States Euro area
the Introduction of
pound inflation targeting
18
UK Introduction Introduction
25 joins of inflation 16
12 of inflation
the 14 targeting
20 targeting 12
ERM 10
8 10
15
8
6
10 6
4
4 Collapse
Collapse
5 of Bretton 2 of Bretton
4 2
Woods
Woods 0
0 0
1970 1980 1990 2000 1970 1980 1990 2000 1970 1980 1990 2000
United Kingdom Canada Australia

Figure 2 Annual CPI inflation rates.

 Monetary Policy Regimes and Economic Performance 1223

monetary policy is now neither comfortable nor communautaire. The new European
Sys- temic Risk Board (ESRB) has yet to start work, and we do not know how it will
operate. This underscores a wider point: laws and governments (and central banks) are
national, whereas the financial system is global, and almost all the large financial
interme- diaries are cross-border — “international in life, but national in death.”
There are two obvious alternatives. First, one can try to make the key laws,
especially insolvency laws for systemic financial intermediaries, and governance and
regulation mechanisms via the FSB and BCBS, international. But would the U.S.
Congress accept a law drafted by foreigners; would the Europeans accept whatever
regulatory policies to which the
U.S. finally agree? What about the rest of the world? Failing that, and failure does
seem the most likely outcome, the other logical solution is to give regulatory control
back to the host countries, causing frictions to the global financial system, and making
cross-border banks effectively into holding companies for separate national banks. Since
neither outcome is palatable, the probable result will be muddle and confusion.
Just a scant couple of years ago, the role and constitutional position of central banks
seemed assured. They should be independent (within the public sector) and deploy
their single instrument of interest rates primarily to achieve a low and stable inflation
rate. If financial disturbance threatened the macroeconomic outlook, a judicious
but determined adjustment of interest rates could pick up the pieces. And it worked,
bril- liantly and successfully, for about 15 years. But now the financial crisis has re-
opened old questions and raised new ones; prior certainties have been flushed away.
How these questions may be answered may be the subject of a similar chapter in the
next Handbook.

APPENDIX
1 The data
Here is a detailed description of the data underlying each figure.
Figure 1 United States: Real GDP is GDPC96,80 GDL deflator inflation is based
on GDPCTPI, and the short-term rate is the federal funds rate
(FEDFUNDS).
Euro area: All of the series are from the ECB’s Area Wide Model’s (AWM) data-
base. Japan: Real GDP and the GDP deflator are from the OECD’s Quarterly
National Accounts (QNA.Q.JPN.EXPGDP.LNBARSA.2000_S1 and QNA.Q.
JPN.EXPGDP.DNBSA.2000_S1), the short-term rate is the call money rate from
the International Monetary Fund’s International Financial Statistics IMF and IFS,
respectively), and the CPI is from the IMF’s IFS. United Kingdom: Real
GDP
80
Unless specified otherwise, all of the acronyms for the United States refer to FREDII, the database found at the
St. Louis FED’s Web site.