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The Art of Monetary Policy

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The Art of Monetary Policy

Lessons from Sun Tzu for Central Banks

MIT Press,

15 min read
8 take-aways
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The Art of War comes to the world of spreadsheets and dot plots.

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More than two millennia after he wrote his classic study, Sun Tzu remains an inspiration for modern authors. In this entry to The Art of War spinoffs, economist Kristin Forbes extracts six of Sun’s principles that apply to central bankers. At first glance, the theme seems a stretch – whether it’s Alan Greenspan’s owlish glasses and inscrutable jargon or Jerome Powell’s bland insistence that late-pandemic inflation was “transitory,” central bankers hardly seem a warlike breed. But Forbes makes the compelling case that central bankers and their strategies have grown more powerful than the generals of earlier generations.

Summary

The Art of War by Sun Tzu laid out a framework applicable to central banks.

In the fifth century BC, Sun Tzu wrote his classic treatise on military strategy. The successful execution of military conflict, he wrote, “is a matter of life and death, a road to either safety or to ruin.” The same can be said today about central banking. Physical security once was the most important goal of a state. Today, economic stability created by effective monetary policy is arguably the more important imperative for many nations. Consider, for example, that the decline in gross domestic product per capita in 2020, in the midst of the COVID-19 pandemic, was more dramatic than in any single year of World War I, World War II, or the Great Depression. And in an interconnected world rife with geopolitical tensions and rising debt, the tools central bankers wield are, as Sun Tzu concluded regarding military victory, more art than science.

Whether decision-makers are generals or central bankers, they are making choices amid rapid change and rampant uncertainty. To navigate this landscape, bankers must embrace six principles:

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About the Author

Kristin Forbes is a professor of management and global economis at MIT’s Sloan School of Management. She is an Honorary Commander of the Order of the British Empire and a research associate at the NBER and CEPR.

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