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Published by EH.NET (March 2004) 
 
Paul Mizen, editor, _Monetary History, Exchange Rates and Financial 
Markets: Essays in Honour of Charles Goodhart, Volume Two_. Cheltenham, UK: 
Edward Elgar, 2003. xi + 281 pp. $95 (cloth), ISBN: 1-84376-086-X. 
 
Reviewed for EH.NET by Lars Jonung, DG ECFIN, European Commission. 
 
In November 2001 the Bank of England arranged a two-day festschrift 
conference to honor Charles Goodhart -- his dual career as a distinguished 
monetary economist and as a prominent central banker. The proceedings of 
the conference are now published in two volumes, the first one focusing on 
the theory and practice of central banking, the second one on monetary 
history, exchange rate arrangements and the regulation of financial 
markets. For researchers in economic history, the second volume is the more 
interesting one -- although the first one contains much about the evolution 
of central banking in recent decades. 
 
As a rule, to review a festschrift is similar to the task of reviewing a 
smorgasbord for a culinary magazine: there are many but disparate dishes to 
consider. Often the festschrift is composed of a set of chapters lacking a 
unifying theme, except being devoted to the scholar honored by the 
festschrift, and held together mainly by a common binding. 
 
This is not the case of _Monetary History, Exchange Rates and Financial 
Markets_. It is well organized according to fields to which Charles 
Goodhart has made significant contributions. And these fields are many as 
he is "the Samuel Johnson of monetary policy" according to one of the 
participants of the conference. 
 
Virtually all of the contributors start out from the work of Goodhart. Then 
the trip takes off in one of two directions: either his work is taken as a 
source of inspiration and pushed further, or it is scrutinized in a way 
that may surprise readers, steeped in the continental European tradition 
that the task of the festschrift is to heap praise on someone who is taking 
the great step out of academia and into retirement. But the criticism -- 
all given by Americans (who else?) -- pays tribute to Goodhart. His work 
stimulates response and rebuttal. These chapters challenge his views and 
interpretations and in so doing, raise the academic standard of the volume 
far above that of the orthodox festschrift. 
 
In the first chapter ("The Role of History of Economic Thought in Modern 
Macroeconomics") David Laidler starts by complimenting Goodhart for not 
being a "modern macroeconomist," as that species lacks the proper 
understanding of the history of economic ideas. Laidler makes a strong case 
for his choice of accolade, demonstrating how a number of prominent 
"modern" economists are misjudging or misusing economic thought and 
historical evidence. Today the prevalent use of models and techniques has 
reduced the pay-off of drawing on history -- the history of the economy as 
well as of economic thought. The question remains: which are the driving 
forces behind this evolution? One guess is that many of the fashionable 
macro-models are ill-suited for empirical testing or do not stand out as 
worthy explanations of historical events. So the easy way out is to turn 
away from the past. 
 
The second chapter by Michael Bordo and Anna Schwartz ("Charles Goodhart's 
Contributions to the History of Monetary Institutions") is an account of 
Goodhart's analysis of the evolution of central and commercial banking. 
They pay great respect to his work, but object to his opinion that "markets 
fail more readily than ... policy-makers and regulators." 
 
In chapter 3 ("Crises Now and Then: What Lessons from the Last Era of 
Financial Globalization?") Barry Eichengreen and Michael Bordo start from 
Goodhart's comparison of the recent Asian financial crisis and the banking 
and currency crises during the classical gold standard, arguing that his 
view is "too simple." Bordo and Eichengreen base their conclusions on an 
impressive number of calculations of the output loss and recovery time from 
crises under various monetary regimes. I advise those who want to sort out 
the arguments to consult footnote 51 - the longest one in the volume. Here 
the problems associated with estimating the output losses caused by crises 
are summarized in a concise way. 
 
In chapter 4 ("Exchange Rate Regimes in Theory and Practice"), Andrew 
Crockett reviews the current literature on the choice of exchange rate 
regime. He is not quite happy with the mainstream view that the world is 
moving towards a bipolar case: viable and sustainable exchange rate regimes 
are found either among monetary unions or in fully floating exchange rates 
cum inflation targeting. He finds it a bit too simplistic -- at the end 
offering no alternative interpretation but some common sense 
qualifications. 
 
The next three chapters are inspired by Goodhart's work on foreign exchange 
markets and the microstructure of foreign exchange trading. Takatoshi Ito 
("Is Foreign Exchange Intervention Effective? The Japanese Experiences in 
the 1990s") presents quantitative estimates of the Japanese intervention 
policy. This premier study -- Ito was the first to get the data -- shows 
convincingly that the interventions have been a highly profitable venture. 
 
Mintao Fan and Richard Lyons ("Customer Trades and Extreme Events in 
Foreign Exchange") and Richard Payne ("Trading Activity, Volatility, and 
Transactions Costs in Spot FX Markets") push the work of Goodhart further 
by using new sets of high frequency data from the exchange markets. They 
all stress the importance of orders flowing from the final customers. These 
customer orders represent the catalyst behind exchange rate movements. 
 
The three last contributions deal with financial regulation. Surveying both 
the theory and the empirical record for Europe, Japan, the U.S. and Canada, 
Elena Carletti and Philipp Hartmann ("Competition and Stability: What's 
Special about Banking?") reject the idea that competition is a threat to 
stability in the commercial banking sector. 
 
Inspired by Goodhart's work on financial supervision, Andrew Sheng and Tan 
Gaik Looi ("Is There a Goodhart's Law in Financial Regulation?") test the 
application of Goodhart's law to financial regulation and find it most 
helpful. Their chapter also contains an annex setting out Goodhart's policy 
conclusions on regulation. The final contribution by Michael Foot ("Working 
with Market Forces") is a most sensible plea for financial regulation to be 
based on a market-oriented approach. 
 
The editor has succeeded nicely in the difficult task of organizing the 
festschrift in a constructive way. The selection of commentators 
contributes to that. The volume ends with some comments by Charles 
Goodhart. I wish he could have been given more of an opportunity to respond 
-- now it is being done indirectly through the commentators serving as his 
medium. All in all, I expect this festschrift to have a half-life much 
longer than the average one. It deserves it. 
 
Lars Jonung is presently co-editing a volume on the internalization of 
asset ownership in Europe, forthcoming from Cambridge University Press. In 
2003 he published _The Demand for Money_ with Michael D. Bordo, as well as 
an anthology on the Swedish record of inflation targeting, 1993-2003 (in 
Swedish). 
 
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