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Four Informational Challenges of Central Banks Today
Central banks today face four daunting informational challenges. First, they must relearn inflation control in a world with multiple complex drivers of inflation. Second, to discharge their responsibilities and enhanced lender of last resort and market maker of last resort they must learn how to value and price systemically important financial assets when markets are disorderly. Third, they must manage the ongoing digitization of the financial system – including DeFi, stablecoins, on-chain bank deposit tokens and CBDCs. Fourth, they must manage the systemic political economy uncertainty associated with the central bank’s inescapable role as a fiscal agent of the state – something that poses an unavoidable, permanent threat to central bank operational independence in the pursuit of price stability.
The Economic Consequences of IT: The IT Revolution’s Meager Benefits and Major Schisms
The IT revolution, underway since around 1980, has featured mediocre growth and rising geographic, educational, and generational inequality. This stands in stark contrast to the broad prosperity and convergence experienced in the 1950s and 1960s. We attribute this change to a swivel in the leading edge of productivity growth away from manufacturing largely present in towns to information technology mainly housed in “superstar” cities. Using a spatial model, we show how this can explain: rising prosperity and rapid housing inflation in “superstar” cities; falling relative wages in towns and the countryside; mediocre aggregate productivity due to increasing misallocation of labor; the loss of manufacturing jobs, especially in cities; and falling migration.
A Mengerian Theory of Knowledge and Economic Development
This paper reconstructs Carl Menger’s theory of economic development centered around the growth of knowledge. Menger made knowledge central to the economic process, long before this was done more widely in economics. His work draws attention to two different types of knowledge, shared cognitive and institutional frameworks which help create coherent and integrated markets on the one hand, and, on the other hand, private—increasingly specialized and differentiated—knowledge used in the production of heterogenous (capital) goods. We situate Menger’s work on economic development in the evolutionary endogenous growth tradition going back to Bernard Mandeville and Adam Smith, and later developed by Alfred Marshall, Allyn Young, Ludwig Lachmann, and others. We use these insights to suggest that one of the crucial questions of economic organization is (1) the complementarity between the two types of knowledge we identify here, and (2) the extent to which knowledge is a part of shared social infrastructures rather than being organized privately within firms and other organizations.
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