Why central banks will just keep getting weaker

Mario I. Blejer, former governor of the Central Bank of Argentina, on independence.

The global financial crisis has raised fundamental questions regarding central banks’ mandates. Over the past few decades, most central banks have focused on price stability as their single and overriding objective. This focus supported the ascendancy of “inflation-targeting” as the favoured monetary policy framework and, in turn, led to operational independence for central banks. The policy was a success: the discipline imposed by strict and rigorous concentration on a sole objective enabled policymakers to control – and then conquer – inflation.

But, as a consequence of this narrow approach, policymakers disregarded the formation of asset- and commodity-price bubbles, and overlooked the resulting banking-sector instability. This, by itself, calls for a review of the overall efficacy of inflation-targeting. Moreover, after the financial crisis erupted, central banks were increasingly compelled to depart from inflation targeting, and to implement myriad unconventional monetary policies in order to ameliorate the consequences of the crash and facilitate economic recovery.

With advanced economies struggling to avoid financial collapse, escape recession, reduce unemployment, and restore growth, central banks are being called upon to address, sometimes simultaneously, growing imbalances. This has triggered a search for a radical redefinition of central banks’ objectives – and has cast doubt on the appropriateness of maintaining their independence.

In particular, central banks’ behavior during the crisis has called into question whether inflation-targeting is an effective framework in the presence of systemic shocks, and, more broadly, whether it can be sustained throughout economic cycles. After all, a policy regime that sets aside its only goal during a crisis seems to lack the ability to cope with unexpected challenges. Critics identify this “crisis straitjacket syndrome” as the main problem with single-minded inflation targeting.

While theoretical arguments can be made to justify recent departures from policy, the reality is that in the post-crisis world, advanced-country central banks’ goals are no longer limited to price stability. In the United States, the Federal Reserve has essentially adopted a quantitative employment target, with nominal GDP targets and other variations under discussion in other countries. And financial stability is again a central-bank responsibility, including for the more conservative European Central Bank.

This shift toward multiple policy objectives inevitably reduces central-bank independence. Some analysts have recently claimed that this is because the pursuit of GDP growth, job creation, and financial stability, as well as the establishment of priorities when there are tradeoffs, clearly requires political decisions, which should not be made by unelected officials alone. Moreover, by pushing interest rates toward zero, the current policy of quantitative easing (increasing money supply by buying government securities) has strong, often regressive, income effects. Opponents of central-bank independence contend that, given the allocational and distributional consequences of current monetary-policy interventions, central banks’ decision-making should be subject to political control.

But this argument neglects an important point. While it is true that multiple policy targets tend to increase the political sensitivity of central banks’ decisions, concentrating only on price stability also has important distributional consequences and political implications. In fact, politicisation is a matter of scale, not a substantive transformation of monetary policymaking.

The real reason why central-bank independence tends to create a democratic deficit under a multi-target monetary-policy regime, and why it has become increasingly vulnerable, is that the two main arguments in favor of it no longer apply.

The first argument in favor of central-bank independence is that, without it, politicians can exploit expansionary monetary policy’s positive short-run effects at election time, without regard for its long-run inflationary consequences. (By contrast, fiscal and exchange-rate policies rarely imply comparable temporal trade-offs, and thus are difficult to exploit for political gain.) But this argument becomes irrelevant when ensuring price stability is no longer monetary policymakers’ sole task.

The second argument for institutional independence is that central banks have a clear comparative advantage in dealing with monetary issues, and can therefore be trusted to pursue their targets independently. But this advantage does not extend to other policy areas.

Given that central banks are likely to continue to pursue multiple objectives for a long time, their independence will continue to erode. As long as governments do not encroach excessively on central-bank decision-making, this development will restore balance in policymaking and support policy coordination, particularly in times of stress.

The rest of this article can be read on economia

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What can you do about Europe's refugee crisis?

The death of a three-year-old boy on a beach in Europe has stirred Britain's conscience. What can you do to help stop the deaths?

The ongoing refugee crisis in the Mediterranean dominates this morning’s front pages. Photographs of the body of a small boy, Aylan Kurdi, who washed up on a beach, have stunned many into calling for action to help those fleeing persecution and conflict, both through offering shelter and in tackling the problem at root. 

The deaths are the result of ongoing turmoil in Syria and its surrounding countries, forcing people to cross the Med in makeshift boats – for the most part, those boats are anything from DIY rafts to glorified lilos.

What can you do about it?
Firstly, don’t despair. Don’t let the near-silence of David Cameron – usually, if nothing else, a depressingly good barometer of public sentiment – fool you into thinking that the British people is uniformly against taking more refugees. (I say “more” although “some” would be a better word – Britain has resettled just 216 Syrian refugees since the war there began.)

A survey by the political scientist Rob Ford in March found a clear majority – 47 per cent to 24 per cent – in favour of taking more refugees. Along with Maria Sobolewska, Ford has set up a Facebook group coordinating the various humanitarian efforts and campaigns to do more for Britain’s refugees, which you can join here.

Save the Children – whose campaign director, Kirsty McNeill, has written for the Staggers before on the causes of the crisis – have a petition that you can sign here, and the charity will be contacting signatories to do more over the coming days. Or take part in Refugee Action's 2,000 Flowers campaign: all you need is a camera-phone.

You can also give - to the UN's refugee agency here, and to MOAS (Migrant Offshore Aid Station), or to the Red Cross.

And a government petition, which you can sign here, could get the death toll debated in Parliament. 

 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.