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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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