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Papers by Charles Goodhart

In this paper we construct a rational expectations model based on a Phillips curve that embodies ... more In this paper we construct a rational expectations model based on a Phillips curve that embodies persistence in inflation. As we assume that the central bank targets the natural rate of output, there is no inflation bias. We derive optimal monetary policy rules that are state-contingent and shock-dependent both in the case where the cental bank follows a commitment strategy and where it pursues a discretionary procedure. Numerical solutions show that in the state-contingent part there always exists a tradeoff between these two optimal rules in that the commitment rule involves smaller expected deviations of inflation from its target but larger expected deviations of output from its target; in the shock-dependent part there can be situations in which the discretionary rule is more effective in reducing the impact of the random shock on inflation and less effective in reducing the random shock on output. Only in the latter case it is possible that one rule is superior; otherwise it is generally the case that a tradeoff exists between these two rules.

Journal of Banking & Finance, 2005

This paper develops a model of the lender of last resort (LOLR) from a Central Bank (CB) viewpoin... more This paper develops a model of the lender of last resort (LOLR) from a Central Bank (CB) viewpoint. The model in a static setting suggests that the CB would only rescue banks which are above a threshold size, consistent with the insight of ''too big to fail''. In a dynamic setting, CBÕs optimal policy in liquidity support depends on the trade off between contagion and moral hazard effects. Our results show that contagion is the key factor affecting CBÕs incentives in providing LOLR and they also provide a rationalization for ''constructive ambiguity''.

Economic Notes, 2000

This paper develops a simple model of an international lender of last resort (ILOLR).

The experience of historical episodes of financial crises in the late 19th and early 20th century... more The experience of historical episodes of financial crises in the late 19th and early 20th century, and also more recent episodes of boom and bust cycles in credit markets suggest that the build up of financial imbalances is reflected in asset prices, especially property prices, rather than in consumer prices. Based on a simple VAR impulse response analysis for a

In this paper we assess the role of asset prices as information variables for aggregate demand co... more In this paper we assess the role of asset prices as information variables for aggregate demand conditions and in the transmission of monetary policy. A Monetary Conditions Index, a weighted average of the short-term interest rate and the exchange rate, has commonly been used as a composite measure of the stance of monetary policy and aggregate demand conditions. However, other

House price bubbles, and their aftermath, have become a focus of macro-economic policy concern in... more House price bubbles, and their aftermath, have become a focus of macro-economic policy concern in most developed countries. This book elucidates the two-way relationship between house-price fluctuations and economic fundamentals. Housing has many features which make it distinct from other assets, like equity. Real estate is not only an asset but also a durable consumption good for households, providing shelter

Pan-European banks are starting to emerge, while arrangements for financial supervision and stabi... more Pan-European banks are starting to emerge, while arrangements for financial supervision and stability are still nationally rooted. This raises the issue who should bear the burden of any proposed recapitalisation should failures occur in large cross-border banks. A recapitalisation is efficient if the social benefits (preserving systemic stability) exceed the cost of recapitalisation. Using the multi-country model of Freixas (2003),

In this paper I try to address the question of whether, and why, it matters whether banking super... more In this paper I try to address the question of whether, and why, it matters whether banking supervision is undertaken in-house in the Central Bank or in a separate specialised supervisory institution. After all, the bank supervisors and those in the Central Bank concerned with systemic stability must continue to work closely together wherever the supervisors are physically located. Nevertheless

This paper sets out a tractable model which illuminates problems relating to individual bank beha... more This paper sets out a tractable model which illuminates problems relating to individual bank behaviour, to possible contagious inter-relationships between banks, and to the appropriate design of prudential requirements and incentives to limit `excessive' risk-taking. Our model is rich enough to include heterogeneous agents, endogenous default, and multiple commodity, and credit and deposit markets. Yet, it is simple enough to

Page 1. The Economic Journal, 99 (June I989), 293-346 Printed in Great Britain THE CONDUCT OF MON... more Page 1. The Economic Journal, 99 (June I989), 293-346 Printed in Great Britain THE CONDUCT OF MONETARY POLICY* Charles Goodhart Nowadays the Central Bank of a country is the monopoly supplier of legal tender currency. ...

The paper investigates whether monetary policy and banking supervision should be separated. The m... more The paper investigates whether monetary policy and banking supervision should be separated. The main argument for separation is that the combination of functions might lead to a conflict of interest. An argument against is that separation is inconsistent with the central bank's concern for the systemic stability of the financial system. In a cross-country survey of 104 bank failures, we

This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of... more This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of either short-term overshooting or of longer-term reversion to an equilibrium. The forward exchange rate contains virtually no information on future spot rates. Discussions with practitioners indicate that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that

The Evolution of Central Banks employs a wide range of historical evidence and reassesses current... more The Evolution of Central Banks employs a wide range of historical evidence and reassesses current monetary analysis to argue that the development of non-profit-maximizing and noncompetitive central banks to supervise and regulate the commercial banking system fulfils a necessary and natural function. Goodhart surveys the case for free banking, examines the key role of the clearing house in the evolution

Complexity, Endogenous Money and Macroeconomic Theory, 2006

Money, Financial Instability and Stabilization Policy, 2006

In this paper we construct a rational expectations model based on a Phillips curve that embodies ... more In this paper we construct a rational expectations model based on a Phillips curve that embodies persistence in inflation. As we assume that the central bank targets the natural rate of output, there is no inflation bias. We derive optimal monetary policy rules that are state-contingent and shock-dependent both in the case where the cental bank follows a commitment strategy and where it pursues a discretionary procedure. Numerical solutions show that in the state-contingent part there always exists a tradeoff between these two optimal rules in that the commitment rule involves smaller expected deviations of inflation from its target but larger expected deviations of output from its target; in the shock-dependent part there can be situations in which the discretionary rule is more effective in reducing the impact of the random shock on inflation and less effective in reducing the random shock on output. Only in the latter case it is possible that one rule is superior; otherwise it is generally the case that a tradeoff exists between these two rules.

Journal of Banking & Finance, 2005

This paper develops a model of the lender of last resort (LOLR) from a Central Bank (CB) viewpoin... more This paper develops a model of the lender of last resort (LOLR) from a Central Bank (CB) viewpoint. The model in a static setting suggests that the CB would only rescue banks which are above a threshold size, consistent with the insight of ''too big to fail''. In a dynamic setting, CBÕs optimal policy in liquidity support depends on the trade off between contagion and moral hazard effects. Our results show that contagion is the key factor affecting CBÕs incentives in providing LOLR and they also provide a rationalization for ''constructive ambiguity''.

Economic Notes, 2000

This paper develops a simple model of an international lender of last resort (ILOLR).

The experience of historical episodes of financial crises in the late 19th and early 20th century... more The experience of historical episodes of financial crises in the late 19th and early 20th century, and also more recent episodes of boom and bust cycles in credit markets suggest that the build up of financial imbalances is reflected in asset prices, especially property prices, rather than in consumer prices. Based on a simple VAR impulse response analysis for a

In this paper we assess the role of asset prices as information variables for aggregate demand co... more In this paper we assess the role of asset prices as information variables for aggregate demand conditions and in the transmission of monetary policy. A Monetary Conditions Index, a weighted average of the short-term interest rate and the exchange rate, has commonly been used as a composite measure of the stance of monetary policy and aggregate demand conditions. However, other

House price bubbles, and their aftermath, have become a focus of macro-economic policy concern in... more House price bubbles, and their aftermath, have become a focus of macro-economic policy concern in most developed countries. This book elucidates the two-way relationship between house-price fluctuations and economic fundamentals. Housing has many features which make it distinct from other assets, like equity. Real estate is not only an asset but also a durable consumption good for households, providing shelter

Pan-European banks are starting to emerge, while arrangements for financial supervision and stabi... more Pan-European banks are starting to emerge, while arrangements for financial supervision and stability are still nationally rooted. This raises the issue who should bear the burden of any proposed recapitalisation should failures occur in large cross-border banks. A recapitalisation is efficient if the social benefits (preserving systemic stability) exceed the cost of recapitalisation. Using the multi-country model of Freixas (2003),

In this paper I try to address the question of whether, and why, it matters whether banking super... more In this paper I try to address the question of whether, and why, it matters whether banking supervision is undertaken in-house in the Central Bank or in a separate specialised supervisory institution. After all, the bank supervisors and those in the Central Bank concerned with systemic stability must continue to work closely together wherever the supervisors are physically located. Nevertheless

This paper sets out a tractable model which illuminates problems relating to individual bank beha... more This paper sets out a tractable model which illuminates problems relating to individual bank behaviour, to possible contagious inter-relationships between banks, and to the appropriate design of prudential requirements and incentives to limit `excessive' risk-taking. Our model is rich enough to include heterogeneous agents, endogenous default, and multiple commodity, and credit and deposit markets. Yet, it is simple enough to

Page 1. The Economic Journal, 99 (June I989), 293-346 Printed in Great Britain THE CONDUCT OF MON... more Page 1. The Economic Journal, 99 (June I989), 293-346 Printed in Great Britain THE CONDUCT OF MONETARY POLICY* Charles Goodhart Nowadays the Central Bank of a country is the monopoly supplier of legal tender currency. ...

The paper investigates whether monetary policy and banking supervision should be separated. The m... more The paper investigates whether monetary policy and banking supervision should be separated. The main argument for separation is that the combination of functions might lead to a conflict of interest. An argument against is that separation is inconsistent with the central bank's concern for the systemic stability of the financial system. In a cross-country survey of 104 bank failures, we

This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of... more This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of either short-term overshooting or of longer-term reversion to an equilibrium. The forward exchange rate contains virtually no information on future spot rates. Discussions with practitioners indicate that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that

The Evolution of Central Banks employs a wide range of historical evidence and reassesses current... more The Evolution of Central Banks employs a wide range of historical evidence and reassesses current monetary analysis to argue that the development of non-profit-maximizing and noncompetitive central banks to supervise and regulate the commercial banking system fulfils a necessary and natural function. Goodhart surveys the case for free banking, examines the key role of the clearing house in the evolution

Complexity, Endogenous Money and Macroeconomic Theory, 2006

Money, Financial Instability and Stabilization Policy, 2006