Wikipedia

Charles Goodhart

Charles Albert Eric Goodhart, CBE, FBA (born 23 October 1936) is a British economist. He worked at the Bank of England on its public policy from 1968–1985, and worked at the London School of Economics from 1966–1968 and 1986–2002. Charles Goodhart's work focuses on central bank governance practices and monetary frameworks.[1][2] He also conducted academic research into foreign exchange markets.[1] He is best known for formulating Goodhart's Law, which states: "When a measure becomes a target, it ceases to be a good measure."[3]

Charles A. E. Goodhart
Goodhart delivers the keynote address during the 2012 Long Finance conference in London
Born (1936-10-23) 23 October 1936 (age 88)
NationalityBritish
Academic career
Institutions
Alma mater
ContributionsGoodhart's law

Early life and education

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Charles Goodhart was born on 23 October 1936 in Oxford, England to Arthur Lehman Goodhart, an American residing in England, and his English wife, Cecily Carter.[1]  His father studied law at Trinity College, Cambridge, eventually becoming a law don at Corpus Christi College.[1] Following the family's move to Oxford, Charles' father became the Professor of Jurisprudence in 1936 and the Master of University College (1951–1963).[1][2] While their father was Jewish, Cecily Carter brought up her three sons (Philip Goodhart, William Goodhart and Charles Goodhart) as members of the Church of England.[1] During World War II, Arthur Goodhart's outspoken opposition to Nazism led to Charles (aged 2) being evacuated alongside his two elder brothers to the United States.[1] Upon their return, Charles joined his brother William Goodhart at the St Leonards branch of the (Oxford) Summerfields School.[1] Charles was then accepted to Eton College where he focused on the study of history and languages.[2] After he finished school, he completed two years of compulsory national military service (1955–1956) in which he was involved with the Hungarian Revolution of 1956 and the Suez Crisis and earned the rank of second lieutenant in the King's Royal Rifle Corps.[2]

Cambridge (1957–1965)

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In October 1957, Goodhart started studying economics at Cambridge University, where he was a member of his father's college, Trinity.[1] In his first year, he came in first in his course.[1] He learnt under economists such as Nicky Kaldor, Richard Kahn, Joan Robinson, Michael Farrell, Frank Hahn and Robin Matthews.[1] In his final year of study, he was paired in tutorials with Sir James Mirrlees.[1] He completed his undergraduate course with First Class Honours.[1] After completing his undergraduate degree at Cambridge, Charles moved to the United States in 1960 to begin research at Harvard University studying trade cycles.[1][2] In June 1962, following the completion of his PhD thesis, which analysed United States monetary history (specifically why the economy rebounded in 1907 but not in 1929), Charles and his new wife travelled back to Cambridge.[1] Charles took up a Prize Fellowship at Trinity College and became an assistant lecturer in economics (1963–1964).[1] He spent the next two years interpreting English monetary history by cumulating and analysing the monthly reports of the London Joint Stock Banks, which were published after the Barings crisis of 1890.[1]

London School of Economics (1966–1968)

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In 1964, Goodhart briefly joined the Department of Economic Affairs.[1] During this time, he worked on White Papers, planning the growth of the energy, construction and housing sectors in England.[1] Goodhart left the Department of Economic Affairs in 1966 when he joined the London School of Economics as a lecturer on monetary policy.[1] During this time, he contributed to a study on English monetary policy Monetary Policy in Twelve Industrial Countries [4] which was commissioned by the federal Reserve Bank of Boston.[1] He also co-authored an article in the field of political economy alongside R.J. Bhansali, which featured in the journal 'Political Studies'.[5] He stayed at the London School of Economics until 1968.[1]

Career

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Bank of England (1968–1985)

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Charles left the London School of Economics to work a temporary two-year assignment at the Bank of England.[1]  He found his expertise in monetary economics and his knowledge of Milton Friedman's ideas to be of high value.[1][2]  He was allocated to the Economic Intelligence Department which was responsible for calculating and simulating economic statistics as well as writing the Bank of England's Quarterly Bulletin.[1] His first job at the Bank of England was to explain the concept of domestic credit expansion to individuals within the Bank, whilst conveying the Bank's viewpoints on such issues to outside economists.[1] In 1970, he was tasked with empirically assessing the predictability of the demand for money, and had the results published in the Bank of England's Quarterly Bulletin in a paper called 'The Importance of Money'.[6] During this time Goodhart served as the first secretary of the Monetary Review Committee, who provided summarised views of monetary developments to the Chancellor and Treasury of England.[1]

 
The Bank of England - London, United Kingdom. (2021)

Whilst attending a conference held by the Reserve Bank of Australia in 1975, Goodhart wrote in his footnotes "whenever a government seeks to rely on a previously observed statistical regularity for control purposes, that regularity will collapse".[7] This quote became known as Goodhart's Law. Goodhart's Law is commonly expressed as: "When a measure becomes a target, it ceases to be a good measure".[3] In 1979, Goodhart jointly wrote a paper which was published in the Bank of England's Quarterly Bulletin.[1] This paper advised the new Thatcher government against implementing monetary base control.[8] In the early 1980's, Goodhart joined the home finance division of the Bank of England, under John Fford.[1] In 1980 he was promoted to Senior Adviser at the Bank of England and stayed at this role until 1985.[1] Following the events of Black Saturday (1983), Goodhart travelled to Hong Kong to assist in implementing a currency board system that was linked to the United States dollar.[1] This system helped solve the Hong Kong monetary crisis.[1] Goodhart served on the Hong Kong Exchange Fund Advisory Council (an advisory board for the Hong Kong Monetary Authority) for more than a decade (1983–1997).[1]

London School of Economics (1986–2002)

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Following Goodhart's departure from the Bank of England, he re-joined the London School of Economics as the Norman Sosnow Professor of Banking and Finance.[1] He co-founded the Financial Markets Group alongside Prof. Mervyn King, in 1986.[1] In late 1987, he gave his first lecture: 'The foreign exchange market: a random walk with a dragging anchor',[9] which was reprinted later in Economica. During this period (1988 – 1995) his work focused on foreign exchange markets, specifically analysing the efficient-market hypothesis.[10] To help with this research, Goodhart (with the help of Reuters) built his own data series.[11] He then collaborated with Swiss firm Olsen and Associates to lead conferences about the importance of high speed data analysis and collection.[11] His results from his work were published in his book: 'The Foreign Exchange Market: Empirical Studies With High-Frequency Data'.[12] Questions he asked Neil Shephard around 1991, encourage the latter to work on problems in financial econometrics.

Goodhart helped advise and publicly supported the Reserve Bank of New Zealand Act (RBNZ) 1989,[13] which permitted the Reserve Bank of New Zealand to vary interest rates to help meet agreed inflation targets.[1] In 1990, Goodhart was elected as a Fellow of the British Academy.[14] In 1997 he was appointed a CBE for services to monetary economics.[14] From late 1997 until May 2000, he was a member of the Bank of England Monetary Policy Committee.[14]

He retired from the London School of Economics in 2002 at which point he was appointed Emeritus Professor of Banking and Finance.[14] Following his retirement, Goodhart continued to write academic articles and books.[11] He assisted in the English Parliament's review of approaches to monetary policy in 2007.[15] Four years prior to the Global Financial Crisis, Goodhart identified how the global economy was financially unstable in his Per Jacobsson lecture 'Some New Directions for Financial Stability?'.[16][2] In the years following the Global Financial Crisis, much of his work has focused on fixing regulation to provide financial stability for the economy, specifically providing reforms that "diminish the extent and volatility of the credit and leverage cycles".[17] In an article included as part of the South African Reserve Bank Conference,[17] Goodhart assessed the actions taken to provide global financial stability and concluded: "proposed reforms are incomplete and/or partially misdirected".[17] In 2015, Goodhart critiqued the Warsh Review of the Bank of England's policy on monetary process.[11]

He was also an economic consultant at Morgan Stanley from 2009 until 2016, when he retired at the age of 80.[14] At the 2021 Central Banking Awards, Goodhart was awarded the Central Banking Lifetime Achievement Award for his work on monetary frameworks, risk management and foreign exchange markets as well as his involvement in the Hong Kong peg, the independence of the Royal Bank of New Zealand and the creation of Goodhart's Law.[11]

Influence

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Goodhart's Law

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One of Charles Goodhart's most prominent contributions to monetary economics is known as Goodhart's Law. Charles wrote this law in the footnotes of his paper Problems of monetary management: the UK experience[7] for the Reserve Bank of Australia during his time at the Bank of England (1975). The law states that: "whenever a government seeks to rely on a previously observed statistical regularity for control purposes, that regularity will collapse".[7] Although written initially as a witty comment about monetary targeting,[1] the underlying thought behind this notion was taken very seriously and was linked to the Lucas Critique of evaluation and policy modelling.[2]

 
Charles Goodhart at the 2015 Financial Times Economists' Christmas Drinks Reception in London.

This law was generalised by anthropologist Marilyn Strathern beyond the world of statistics. The most commonly used version of Goodhart's Law comes from Strathern's paper: "When a measure becomes a target, it ceases to be a good measure".[3] In reflection to the creation of Goodhart's Law, Charles wrote: "it does feel slightly odd to have one's public reputation largely based on a minor footnote".[1]

Research

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Goodhart pioneered the integration of macroeconomics and finance, bringing them together in the monetary and regulatory policies of central banks.[2] [18] He advocates for policies that are supported by a strong theoretical base and backed up by empirical evidence and data.[2] To provide this empirical evidence, Goodhart used economic models that can be expressed in the mathematic form.[2] He found value in mathematical models as they can be integrated with real world data – exposing their usefulness and any underlying interactions.[2]

He is quoted saying: "It is only by constructing a mathematical institutional economics that one can study the economic system in a rigorous and analytical manner".[19]

Throughout his career, Goodhart played a role in improving the practice of financial regulation and central banking by making it easier for governments and central bankers to benefit public welfare by dampening economic cycles.[2]

Selected works

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Google Scholar listed Charles Goodhart being the author or co-author of 539 articles and books by the end of 2017.[2] His most cited works include Money, Information and Uncertainty and The Evolution of Central Banks. [2]

List of prominent published works
Author Year Title Publisher Notes
Goodhart, C. 1988 The Evolution of Central Banks The MIT Press This book addresses a variety of historical evidence. It argues that central banks serve a natural and necessary function to regulate and supervise commercial banks.[20][21]
Goodhart, C. 1989 Money, Information and Uncertainty The MIT Press This book covers most if not all aspects of monetary economics. It serves as a university textbook. It has eighteen chapters. The first nine focus on microeconomic issues and the following nine focus on macroeconomic issues.[20][22]
Goodhart, C. 1995 The Central Bank and The Financial System Palgrave Macmillan This book contains a collection of twenty-one published articles that address the shifting purpose of central banks over time, assess attempts to preserve price stability and critique debates about the United Kingdom's financial regulation proposals. Part I analyses the functions and purpose of central banking. Part II focuses on the existing objectives of central banks, particularly the maintenance of price stability. Part III takes a broad look at financial regulation and its issues.[20][23]
Ferrin, E & Goodhart, C 2001 Regulating Financial Services and Markets in the 21st Century Hart Publishing This article is a collection of essays that examine the effects of the Financial Services and Markets Act 2000. It specifically looks at the United Kingdom's financial sector and how it is evolving alongside the rapidly changing global economy.[24]
Goodhart, C. 2001 What Weight Should Be Given to Asset Prices in the Measurement of Inflation? The Economic Journal This article argues that using pure Alchian/Klein methodology lends excessive weight to unstable asset prices (e.g. housing) and that there are more suitable weighting schemes (e.g. those that derive either from final expenditures or econometrically measured relationships).[25]
Goodhart, C. 2008 The Regulatory Response to the Financial Crisis CESifo Working Paper Series No. 2257 This paper was Goodhart's response to the Global Financial Crisis in 2007. He examines six aspects of financial regulation within the United Kingdom's economy that the Global Financial Crisis highlighted. He then goes on to provide remedies for these regulatory failings.[26]
Brunnermeier, M., Crocket, A., Goodhart, C., Persaud, A. & Shin, H. 2009 The Fundamental Principles of Financial Regulation International Center for Monetary and Banking Studies Centre for Economic Policy Research Goodhart co-authored the 'Geneva Report on the World Economy 11'. This report examines and breaks down the regulatory failings that led to the Global Financial Crisis and provides conclusions and recommendations to avoid future economic crisis.[27]
Goodhart, C. 2010 Is a less pro-cyclical financial system an achievable goal? National Institute Economic Review In this article, Goodhart explains potential regulations that may lead to banking and finance becoming less cyclical.[28]
Goodhart, C. & Pradhan, M. 2020 The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival Palgrave Macmillan This book looks into what the future holds for the global economy as it is changed by the forces of globalisation and demography. It addresses matters such as dementia, ageing, inequality, retirement, populism and debt finance.[29]
Goodhart, C. & Vu, Ly Hoang 2024 Credibility, trust, and perception of authorities’ performance VoxEU When respondents feel most concerned with the need to prevent inflation, trust in all the various institutions of authority has become lower, while it is marginally higher when respondents cite economic growth as one of their most important concerns.

References

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  1. ^ a b c d e f g h i j k l m n o p q r s t u v w x y z aa ab ac ad ae af ag ah ai aj ak al Goodhart, Charles (1997). "Whither Now?". Banca Nazionale del Lavoro Quarterly Review. 50: 385–430 – via Banca Nazionale del Lavoro.
  2. ^ a b c d e f g h i j k l m n o Kohn, Donald; Cord, Robert (2019). "Charles Goodhart (1936–).". The Palgrave Companion to LSE Economics. London: Palgrave Macmillan. pp. 765–789. ISBN 9781137582744.
  3. ^ a b c Strathern, Marilyn (1997). "'Improving ratings': audit in the British University system". European Review. 5 (3): 305–321. doi:10.1002/(SICI)1234-981X(199707)5:3<305::AID-EURO184>3.0.CO;2-4. S2CID 145644958.
  4. ^ Grant, A. T. K. (1 June 1974). "Karel Holbik. Monetary Policy in Twelve Industrial Countries". The Economic Journal. 84 (334): 420–421. doi:10.2307/2231281. ISSN 0013-0133. JSTOR 2231281.
  5. ^ Goodhart, C. A. E.; Bhansali, R. J. (1970). "Political Economy". Political Studies. 18: 43–106. doi:10.1111/j.1467-9248.1970.tb00659.x. S2CID 220338615 – via Sage Journals.
  6. ^ Goodhart, C. A. E (1970). Crockett, A. D. (ed.). "The importance of money". Bank of England Quarterly Bulletin. Q2: 159–198.
  7. ^ a b c Goodhart, C. A. E. (1975). "Problems of Monetary Management: The U.K. Experience". Papers in Monetary Economics. 1. Sydney: Reserve Bank of Australia.
  8. ^ Foot, M. D. K. W; Goodhart, C. A. E.; Hotson, A. C. (1 June 1979). "Monetary base control". Bank of England Quarterly Bulletin. Vol. 19, no. 2. pp. 148–159.
  9. ^ Goodhart, C. A. E. (November 1988). "The foreign exchange market: a random walk with a dragging anchor" (PDF). Economica. 55 (220): 437–460. doi:10.2307/2553908. JSTOR 2553908.
  10. ^ Kohn, Donald (2019). "Charles Goodhart (1936–)". The Palgrave Companion to LSE Economics. London: Palgrave Macmillan. pp. 765–789. ISBN 978-1-137-58274-4.
  11. ^ a b c d e Jeffery, Christopher; Hinge, Daniel; Harde, Dan; King, Racheal; Mendez-Barreira, Victor; Towning, William; Shen, Alice (17 March 2021). "Lifetime achievement: Charles Goodhart". Central Banking. Retrieved 20 May 2022.
  12. ^ Goodhart, C. A. E; Payne, R (2000). The Foreign Exchange Market: Empirical Studies with High-Frequency Data. Palgrave Macmillan. ISBN 978-0333630839.
  13. ^ Reserve Bank of New Zealand; The Parliamentary Counsel Office. "Reserve Bank of New Zealand Act 1989". New Zealand Legislation.
  14. ^ a b c d e "Charles Goodhart Biography | Santander International Banking Conference". www.santander.com. Retrieved 27 May 2022.
  15. ^ The Monetary Policy Committee of the Bank of England: ten years on (PDF). House of Commons Treasury (Report). Vol. 1. 18 September 2007. HC 299–I.
  16. ^ Goodhart, C.A.E. (2004). 'Some New Directions for Financial Stability?'. Per Jacobsson Lecture. FMG Special Papers sp158, Financial Markets Group.
  17. ^ a b c Goodhart, C.A.E. (2011b). 'The Emerging New Architecture of Financial Regulation'. Chapter 1 in Monetary Policy and Financial Stability in the Post-crisis Era. South African Reserve Bank Conference Series 2010, South African Reserve Bank 90th Anniversary. Pretoria: South African Reserve Bank: 1–5
  18. ^ Goodhart, Charles (2022). "Holistic Bank Regulation". In Farmer, Doyne; Kleinnijenhuis, Alissa; Schuermann, Til; Wetzer, Thom (eds.). Handbook of Financial Stress Testing. Cambridge University Press. pp. 370–380. doi:10.1017/9781108903011.025. ISBN 9781108903011.
  19. ^ Goodhart, C.A.E. (2013). 'Narratives of the Great Financial Crisis (GFC): Why I Am Out of Step'. Journal of Financial Perspectives, 1(3): 13–19.
  20. ^ a b c "Charles Goodhart". The MIT Press. 2022. Retrieved 20 May 2022.
  21. ^ Goodhart, C. A. E (1988). Evolution of Central Banks. The MIT Press. ISBN 9780262570732.
  22. ^ Goodhart, C. A. E (1989). Money, Information and Uncertainty. The MIT Press. ISBN 978-0262570756.
  23. ^ Goodhart, C. A. E. (1995). The Central Bank and The Financial System. Palgrave Macmillan London. ISBN 978-0-230-37915-2.
  24. ^ Goodhart, C. A. E (2001). Regulating Financial Services and Markets in the 21st Century. Hart Publishing.
  25. ^ Goodhart, C. A. E. (June 2001). "What Weight Should be Given to Asset Prices in the Measurement of Inflation?". The Economic Journal. 111 (472): 335–356. doi:10.1111/1468-0297.00634. JSTOR 2667880.
  26. ^ Goodhart, C. A. E. (December 2008). "The regulatory response to the financial crisis" (PDF). Journal of Financial Stability. 4 (4): 351–358. doi:10.1016/j.jfs.2008.09.005. S2CID 154459340.
  27. ^ Brunnermeier, Markus; Crocket, Andrew; Goodhart, Charles; Hellwig, Martin; Persaud, Avinash; Shin, Hyun (2009). The Fundamental Principles of Financial Regulation: Geneva Report on the World Economy 11 (PDF). Geneva Report.
  28. ^ Goodhart C. IS A LESS PRO-CYCLICAL FINANCIAL SYSTEM AN ACHIEVABLE GOAL? National Institute Economic Review. 2010;211(1):81-90. doi:10.1177/0027950110364100
  29. ^ Goodhart, Charles; Pradhan, Manoj (2020). The Great Demographic Reversal. doi:10.1007/978-3-030-42657-6. ISBN 978-3-030-42656-9. S2CID 225377346.
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