True or False?
The statement is outlines the policy irrelevance proposition, about which there is substantial controversy. The basic argument is that central banks should not try to fine-tune the economy with regard to short-run business cycle shocks because they know no more than the private sector which, had it not been equally ignorant, would have made correct pricing and output decisions and thereby avoided the cyclical deviation from full employment. And, by the time the central bank has figured out how to fix the problem, the private sector will also have understood the appropriate corrective actions and taken them.
The problem with this proposition is that it assumes that the central bank and the private sector have equal abilities to understand and forecast what is happening to the economy. While university economists and those employed by major firms in the economy may well be as competent as those which the central bank can hire, it would seem unrealistic to assume that the entire private sector is as well-endowed with analytical expertise as is the central bank. Those parts of the private sector that operate at too small a scale to be able to afford such expertise are left having to decide between a range of often conflicting popular arguments in the press and in business circles. And major firms that might have appropriate expertise have no incentive to widely share it with smaller competitors and firms in other industries. Accordingly, central bank analysts probably have an advantage over much of the private sector in figuring out the reasons why the economy is in its current state and, given this superior information, can determine centralized economy-wide approaches to correcting adverse situations. After all, it is the central bank that has control over the country's money supply.
Accordingly, it would seem that the best policies for central banks to follow would be to determine, as best they can, the causes of the current situations they have to deal with and to design appropriate policies to correct matters. While doing this, they should provide full information to the private sector about the conclusions they have reached and detailed information about the policies they are going to follow. To the extent that private decision makers can use that information to improve the management of their economic situations, so much the better. The possibility that certain private decisions may make some of the central banks actions superfluous would seem to be a cost well worth bearing. It is difficult to imagine that private sector decisions made with knowledge about what the central bank is doing would actually make the situation worse.