Central Banking: Art or Science? Lessons from the Fed and the ECB”

Never has central banking been more subjected to scientific analysis than during the last two decades. Increasingly, the economic profession has moulded the behaviour of the central banker into abstract economic models. This has made it possible to analyse how the central banker can be given incentives that will make him do the right thing, how he should set interest rates optimally, how he should be made accountable and what his punishment should be if he fails to comply to the terms of his contract. And yet, after the scientific onslaught of the last decades there is still this feeling that after all, central banking is mainly an art, and that the success of a central banker depends on such intangibles as feeling the mood of the market. The scientific and the artistic views of central banking are well represented by two recently published books. The first one tells us the saga of Greenspan. Written by the best-selling author Bob Woodward, it presents us with a novel-like account of how Greenspan contributed to the miracle of the new economy in the US. This book is about the art of central banking. At the other extreme there is a remarkable book of Otmar Issing and his collaborator