Central Bankers hostage to the Past

Over the past week Bernanke (and Paulson) have been jawboning the Dollar higher. It struck me that these guys seem to be hostage to their past.

All Central Banks profess to have a twin mandate: 1) Price Stability and 2) Economic Growth. But when the cycle turns (the current situation would qualify) price stability and economic growth are bipolar requirements. In these situations Central Banks must choose one of the following:

1) Raise interest rates and thus control inflation, which would dampen Growth.

OR

2) Keep the Monetary Spigot flowing thus supporting growth but fueling the inflationary pyre.

Depending on the Central Bank's read of their economic history they seem to chose one or the other. Witness Trichet and the ECB being much more hawkish on inflation. I daresay their worldview is colored by the Austrian and Weimar hyper-inflationary episodes.

On the other hand Greenspan and Bernanke seem to me more concerned about potential deflationary episodes - a'la the Great Depression. Thus their policy reaction is always to ratchet down monetary rates. (Volcker though would seem to defy this explanation.)

In India we have been lucky never to have seen hyper-inflationary episodes. In fact when inflation hits double digits governments usually fall. The RBI seems to have had a pro-active stance on inflation and keeping monetary policy generally tight. Economists here seem to have based their world-view on the Austrian model.