The next generation of central banking

The dramatic changes in the global economic is ushering a new generation of central bank behavior. Adam S. Posen of the Peterson Institute for International Economics, spoke about the four generations of central banking, defined by their primary economic motive a few years ago.

This can be updated for the next two generations:

First generation - stagflation 1970-79 – The period of central bank failure.

Second generation - disinflation 1979-87 – The ascent of monetarism and money contraction.

Third generation - financial liberalization 1987-99 - The period of great moderation, productivity growth, and inflation targeting leads to stability.

Fourth generation - globalized production 1999-2006 – The open economy and capital mobility; an era of central bank frustration, deflation fights and the bond conundrum.

We will define two new generations, the current and future:

Fifth generation – Systematic financial and banking decline 2007-2009+ - The failure of excesses and the inability of central banks to control asset price bubbles.

Sixth generation – Quantitative easing global recession 2009- ?? – The great return of global growth or the new failure from inflation returning.

Setting the tone for an era is important. It provides context to behavior and an explanation for what we may face. The bank decline may be over by the end of the year, but the central bank focus around the globe will be quantitative easing and the potential for new inflation. I hope that our characterization will be to some degree wrong.