Kris Mitchener on What Actually Anchors the Price Level

In this episode of Macro Musings, host David Beckworth engages with Professor Kris Mitchener, an economic and monetary historian from Santa Clara University, to explore the fundamental question: what truly anchors the price level? Drawing on historical insights from bimetallism, the gold standard, and the interwar gold exchange standard, Mitchener argues that the price level is not anchored by metallic backing alone, but by credibility—specifically, the political and institutional commitment to price stability. He highlights how the gold standard’s credibility was undermined in peripheral nations due to limited state capacity and asymmetric shock transmission, and how the expansion of democratic franchise after World War I made rigid adherence to external balance untenable. The discussion then shifts to modern central bank balance sheets, where Mitchener and his co-authors analyze operating losses across 10 advanced economies during disinflationary periods. Their research reveals that recent losses are not primarily due to tight monetary policy itself, but rather the legacy of large, long-duration, low-yield asset portfolios from quantitative easing and the global financial crisis—combined with ample reserves and interest on reserves. The key insight is that central bank credibility, not balance sheet health, is what ultimately sustains price stability. Even with negative equity, central banks can continue their mandate if markets believe in their commitment and fiscal backing. The episode concludes with a broader reflection on institutional design: central bank independence, operational flexibility, and the political economy of losses. Mitchener emphasizes that credibility is fragile and easily eroded by perceptions of mismanagement, even if operational capacity remains intact. He points to the French banking crisis of the 1930s as a cautionary tale where loss of independence led to preferential lending and systemic collapse. The takeaway is that the anchor of the price level is not a technical rule or commodity, but a deeply political and institutional construct—credibility built over time through transparency, consistency, and the perceived ability to deliver on a mandate. For policymakers, the lesson is clear: maintaining central bank independence and designing resilient institutions are as critical as setting interest rates.