ABSTRACT
The analysis in Chapter 14 indicates that open-market and/or foreign-exchange operations by a central bank affect not only current aggregate demand, but also relative factor prices and future marginal production costs associated with public and private production worldwide. It would seem, therefore, that interventionist central banks in market economies either intervene too little, or more likely, too much. If they indeed know better than the marketplace the optimal time paths not only for public and private production worldwide, but also for the combinations of factors to be used in that production, then the central banks, not the markets, ought to allocate factors and decide production levels. If they do not know better than the market, then their interventionist policies may indeed not only affect aggregate demand, but may also induce unwanted or undesired changes in relative factor prices and levels of public and private production. Furthermore, absent complete agreement upon a mutually consistent set of objectives and strict cooperation in pursuing them, a policy action by one central bank may easily thwart the intended effects of another central bank's actions. In addition, as is well known, interventionist central banks face a "time inconsistency" problem.
