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INTERVIEWS
WITH ECONOMISTS
PROFESSOR
JOHN FOSTER
John Foster
is currently Professor of Economics at the University of Queensland.
He has a PhD in Economics and has previously taught at universities
in Manchester, Glasgow, British Columbia and Adelaide. His interests
include macroeconomic theory and macroeconometric modelling, structural
change and discontinuity in economic systems, money and banking,
inflation and unemployment, and innovation and competition policy.
Why is
it that the British economy is more prone to boom–bust cycles
than is the US economy?
The British
economy is a more ‘open’ economy than is the US economy.
That is to say, if we take the ratio of imports or exports to
GDP, it is higher in the former than in the latter. Thus, any
fluctuations in economic activity in the world as a whole tend
to have a greater impact upon the UK. Also, the British have sought
to ‘manage’ their exchange rate. In other words, they
try to manipulate interest rates in order to keep sterling at
some target level. The value of the deutschmark (and now the euro)
has often constituted the target, either formally or informally.
Each time the British Government opts for a relatively strong
pound, excessive unemployment is generated. Participation in the
European Exchange Rate Mechanism (ERM) in the early 1990s had
this effect. After the UK was forced to leave the ERM and sterling
devalued by about 20 per cent, the unemployment rate fell sharply.
If you
were the governor of the Bank of England, what would you do about
monetary policy?
Following
the lead of the New Zealand Reserve Bank, many reserve banks,
including the Bank of England, have become largely independent
of their governments, and target the rate of inflation in setting
their interest rates. If I were the governor of the Bank of England,
I would use monetary policy only in the ‘medium term’,
in other words I would monitor inflation, as well as other indicators,
such as unemployment and surveys of business conditions, averaged
over three to four years. Also, following the lead of the Reserve
Bank of Australia in 1998, I would make little attempt to use
monetary policy to maintain the value of the exchange rate when
it came under pressure because of an actual, or anticipated, deterioration
in the balance of payments position. Raising interest rates to
defend sterling adversely affects economic activity, in addition
to affecting inflation. It is not really appropriate for a central
bank to interfere with the ‘real’ economy in such a
manner.
Would the
effect of the Asian currency crisis be more pronounced in Europe
than in the United States?
There is no
real reason why any Asian crisis impact should have been more
pronounced in Europe than in the US. We can now look on the EU
as a single diversified economy that is larger than the US economy
and has a similar capacity to absorb external shocks. The crisis
tended to lower the Asian capability to import goods and services
and also to produce goods for export. Although this implies negative
multiplier effects for the world as a whole, China, which has
been largely unaffected by the Asian crisis, has taken up most
of the slack that has emerged. In the longer term, the devaluation
of affected Asian currencies will stimulate their exports and
lead to renewed confidence, provided that they can demonstrate
political stability and improved economic management.
You have
done some work involving an evolutionary economics approach to
the monetary sector. Could you explain this work in simple language?
What happens
in the monetary sector is strongly affected by laws, regulations
and other institutional factors. Since the banking crises of the
interwar period, governments have come to realise that banking
performs a fundamental facilitating role in the wider economy.
Thus, banking became, simultaneously, controlled and protected
by regulations. In the postwar period we witnessed non-bank financial
institutions entering new market niches that banks were precluded
from and, ultimately, the deregulation of some aspects of banking
to allow banks to compete more effectively. An ‘evolutionary’
economic approach attempts to understand the tendency for sectors
of the economy to become both more organised and more complex
as opportunities to expand are taken. The selection processes
at work that lead to the success and failure of new products and
productive processes are also studied. Such an approach draws
much inspiration from the work of Joseph Schumpeter from over
half a century ago, combined with novel modern perspectives and
methods drawn from complex adaptive systems theory.
What is
the evolutionary economics approach to monetary policy?
Since banks
create most of what we define as money when they provide credit,
the ‘evolutionary’ process going on in the monetary
sector impacted upon the creation of money. Thus, how money related
to other important macroeconomic variables, such as aggregate
income/expenditure, prices and interest rates, was affected by
the regulatory regime in operation. Changes in such regimes led
to important changes in such relationships and difficulties for
central banks attempting to base their monetary policies upon
non-evolutionary models of money creation. The vision of monetary
policy that eventuates from an evolutionary economic approach
is a longer term one, with a predisposition against controlling
money magnitudes or interest rates to affect inflation or real
activity in the short term because of the adaptive ingenuity of
economic agents. Ongoing monitoring of the adequacy and relevance
of regulatory arrangements is recommended as financial innovation
takes place and competitive advantage shifts from one type of
institution to another. Monetary growth that emanates from business
activities in the private sector and results in the expansion
of bank credit should be viewed permissively, unlike monetary
growth that is a result of deficit financing by governments. Historically,
it has been the latter that has resulted in significant periods
of inflation.
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