These four books (and one paper) will guide you through the history of central banks, how they work now and where they might be headed
are listened to and scrutinised as closely as those uttered by central bankers. Those bankers control the steering wheel of the macroeconomy by setting interest rates and influencing expectations of their future levels. The first central bank, Sweden’s Riksbank, was founded in 1668. The Bank of England was formed in 1694. Some countries only adopted one much later—America’s Federal Reserve was created in 1913.
Another common misconception is that the purpose of quantitative easing , in which central banks buy assets from commercial banks in exchange for reserves, is to cause commercial banks to lend those reserves out to consumers. In fact central bank reserves cannot be lent to consumers.
Alan Greenspan, chairman of America’s Federal Reserve from 1987 to 2006, is one of the most controversial central bankers of all. His tenure included one of the longest periods of low inflation and solid growth in American history—later called the “Great Moderation”. But he also presided over the buildup of risks that led to the financial crisis of 2007-09. Sebastian Mallaby provides a deeply critical but ultimately sympathetic portrayal of this polarising figure.
The book, published in 2016, goes to lengths to understand Mr Greenspan’s psychology, not only his adventures in the halls of power. He was once a jazz musician, loves tennis and counts Ayn Rand as a major intellectual influence—Mr Greenspan introduced her to President Gerald Ford. It assesses what Mr Greenspan’s career might tell us about the Fed’s response to the mortgage bubble of the 2000s.
Perhaps his biggest legacy is bringing academic ideas to the Fed. In board meetings he broke the chairman’s convention of speaking first, to encourage more open discussion. His research on transparency in central-bank communication informed his use of “forward guidance”—saying how monetary policy will be set in future, in order to influence market expectations.
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