Ulrich Bindseil: If You’re Interested in Monetary Policy Operations, Get Your Hands on His Book

I plan to do a series of posts covering various aspects of monetary policy operations and theory, including the following topics:

1. Coherently designing and evaluating monetary policy ideas using a framework that clearly distinguishes between monetary policy implementation and monetary policy strategy
• The relevant application to today will be to facilitate discussion between those enthusiastic and skeptical about novel central banking approaches, such as “NGDP targeting"
2. Origins, history, and evolution of the perennial debate between interest rate theorists and quantity theorists in the realm of monetary policy
• Because this debate never seems to end, and econ nerds love it
3. How central banks control interest rates, with a specific focus on how they alter them
• This topic is often discussed in the blogosphere and academia, but usually at a shallow level. Even when online mainstream and heterodox (more often) discussions have gone deeper, I’ve found the expositions to leave open several questions. I’m excited to share with the online community some very logical answers that I’ve found in the most recent literature out there (hint hint).
4. Where does shadow banking, repo, and other funding markets fit into all this?
• Perry Mehrling has a great point: how did the econ profession, including the heterodox schools, overlook an area that's overtaken banking as the largest source of credit in our economy, with interest rates often below the fed funds rate (FFR)? How do we make sense of the relationship between the FFR and repo rates?

In writing these posts, I will borrow heavily from the work of Ulrich Bindseil, among others. However, I wanted to specifically mention Ulrich Bindseil at this point, since it’s a name I don’t think many people on the blogosphere are familiar with. Post-Keynesian fans definitely should be. Ulrich Bindseil is the Deputy Director General of Market Operations at the European Central Bank. While Bindseil may ultimately be more in line with mainstream macroeconomic theory as whole*, Post-Keynesians frequently cite him to lend force to their views of monetary policy operations. While I am not familiar with the entire range of Post-Keynesian work on monetary policy theory, Bindseil’s work adds a level of specificity and mathematical support that I haven’t seen in Post-Keynesian papers – but again, this could just be my lack of familiarity with the lit. 

Bindseil has published arguably the most comprehensive reference book for understanding monetary policy implementation up through the Global Financial Crisis: Monetary Policy Implementation: Past, Theory, and Present. (As the book was published in 2004, an updated edition that incorporates the evolving practices of central banks since the crisis would be welcome.) It is a tremendous piece of work, covering the history of the debate between interest rate and quantity theorists since the 18^th and 19^th centuries, reviewing the evolution of monetary policy implementation theory up through the present, and surveying a variety of central banking techniques used around the world. Here’s Bindseil powerfully justifying the existence of the book:

“A book on this topic may be justified on two grounds. First, no comprehensive treatment of monetary policy implementation yet exists. Textbooks on monetary theory and policy often treat implementation only as a side issue, and today’s central banks would probably also find that books like Mishkin (2004) or Walsh (2003), for instance, do not really answer all the major questions arising from monetary policy implementation. Woodford (2003) contains a short theoretical treatment on monetary policy instruments which is in line with the approach presented here, but he does not go into the detail of alternative operations techniques. Studies of monetary policy implementation are either of [an empirical nature] or treat only one country... It is hence not easy to rapidly obtain a general understanding of the topic. Second, there appear to be a number of chronic misunderstanding in the domain of monetary policy implementation that deserve a treatment in the light of the views that have emerged among central banks in the past two decades. It will indeed be argued that some of the twentieth century literature on the topic needs to be reassessed, and that a series of dubious conclusions were reached that have not only persisted in academic circles and infiltrated textbooks but also, at least temporary, influenced central banks.”

In other words, if you’re interested in this topic, three words: find a copy. The book is very accessible. This is not Woodford’s Interest and Prices, which is very heavy on math and formulas. The vast majority is descriptive text, with math sparingly sprinkled about to formally represent the arguments being made. Elementary stochastic calculus is the most advanced math that appears, but it is sparingly used and not necessary for understanding the key takeaways. I've not yet finished the book but have found it spectacular thus far.

Okay, a post on topic number 1 above coming soon...

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UPDATE
*Bindseil et al. provide an excellent review of the endogenous money debate in an issue of the Review of Keynesian Economics that celebrates the 25th anniversary of Basil Moore's Horizontalists and Verticalists. This article provides a good sense of where Bindseil "stands," in that he essentially holds a very Post-keynesian view of credit and banking but also views the natural interest rate model as correct (see critique #1 in Section 5).