This makes me smile a little bit because, well,
when I say maintain currency stability and thereby promote economic growth,
I immediately think, yes, well possibly, but maybe not.
[LAUGH] Just think of this.
Let's assume, this is clearly not the case now,
that the one would be at a very high level, indeed,
an overvalued level vis a vis the Euro and vis a vis the dollar.
Remember when we saw the Big Mac parity?
This was more the case for the Swiss Franc than for the Chinese currency, but
let's assume that we swap here,
and that the most expensive Bic Mac is that of China.
And so China becomes the most expensive currency in place of the Swiss Franc.
So a really overvalued currency.
Would a central bank aiming at maintaining the value
of a currency at an overvalued level achieve economic growth?
I am not sure about that so.
Probably here we have to take these mandates with a pinch of salt,
and assume that here we're talking about maintaining stability in
the currency market, but not when the currency is at an overvalued
level because that's not going to ensure economic growth.
Okay, so we here that central banks may have different goals but
they all are more or less converging,
price stability, focus on currency, but
not all of them include financial stability in their mandates.
But we're going to be talking about this with debate with Jean Pierre Dante in
the next video.
Before we move into the key issue of whether financial stability
should be part in puzzle of the mandate of the central bank I want to
illustrate with you this principle of this mister Jan Tinbergen,
he was actually the first economist who won the Nobel Prize
when it was first instituted in 1969.
And Jan Tinbergen made a very famous contribution for
economist when dealing with Central Banks, and it became the key principle.
And the key principle is actually a simple one, but very powerful idea.
That basically central banks have instruments and they have goals.
Instruments can be the interest rates,
can be currencies, and the currency, money supply, and
goals can be priced ability, can be financial stability.
Can be full employment.
Sometimes the instrument could be a goal and say, typically the currency, right?
As we just saw.
Some central banks do say that their aim is actually to maintain a stable currency.
Okay so an instrument can also be a goal but the rule of Mr.
Jan Tinbergen is to say, you should have as many instruments as there are goals.
Ie you know the famous saying which says,
you try sometimes to kill two birds with one stone.
But here Mr. Tinbergen says you cannot kill two birds with one stone,
you need two stones, okay?
So this is principle.
Now let me illustrate you how sometimes central banks may have conflicting goals.