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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A general election means Jeremy Corbyn's euroscepticism is finally an asset

The Labour leader's track record means he can connect with Remain and Leave voters alike. 

The first anti-establishment party leader to offer true ideological opposition and alternative to the Thatcher consensus in a generation is staring down the barrel of a 20 point polling deficit at the start of this snap election race. This leader has filled halls; galvanised hundreds of thousands and consistently voted on the side of freedom, progress and justice. So just why has he been abandoned by those who should support him?

While Jeremy Corbyn’s leadership has rightly been held to account, the criticisms have been, at times, unfairly amplified both by hostile MPs and a condescending press. With the election just over 40 days away, the left must now realise the severity of the task at hand, and question whether its constant attacks are helping to create the monstrous Tory landslide we all so fear. In the run-in, Corbyn will need unified backing by all those who oppose austerity, inequality and injustice, in a way he’s so far failed to receive.

The votes for Brexit and Donald Trump show the sheer disillusionment with the extreme centre governments of the last decades, that have given rise to mass inequality, caused global instability and brought terrorism to our doors. While Corbyn’s policies – on nationalising railways, foreign intervention, supporting the NHS, tuition fees, and more – are overwhelmingly supported by the public, he has so far lacked the communicative edge to ride the wave of this new age of populism. Whereas policy-lite Trump romped home with the mere repetition of eight syllables, Corbyn often misses opportunities to sell the bright, inclusive future needed to inspire the British public. He needs to create the punchy soundbite that sells his vision, in one, short sentence what a future Britain can look like, and how it stands in stark contrast to that of the Tories.

Throughout his spell at the helm of the Labour Party, Corbyn’s style has constantly been ridiculed; from his dress sense to tone of voice. So what do we really value in a leader and how should they act?

As PM, David Cameron regularly hit home in Parliament, brashly mocking opponents with quips and digs. He stood smug and unrepentant as deeply damaging cuts were enforced. But while he was once considered a strong and stately leader, history now judges him quite differently. For inflicting austerity, and leaving behind a heavily divided Britain, he’s now recognised as one of the worst. Theresa May’s brief stint at leadership has already seen a humiliating u-turn, dodged live debate and false election date promises, all while cruelly playing with the lives of millions of EU nationals.

Meanwhile, Corbyn, who at times has been unfairly lambasted for his approach has consistently displayed personal and professional dedication to championing pro-people politics for over 30 years, undeterred by spin and political games. Compassion, equality, fairness - surely these leadership traits hold equal worth.

In an election based primarily on Brexit, Corbyn can take real and emboldened ownership. A lifelong eurosceptic, Corbyn has the chance to offer a people-led Brexit that works for the majority, reaching out to Leave and Remain voters alike.

Much of the Remain protest movement and post-referendum activism revolves around fears of Britain becoming racist, hostile and isolationist in its approach to would-be migrants, and EU nationals. In negotiations, if a deal on immigration is to be struck, Corbyn’s historically compassionate views on migrants and refugees could create the most fair, humane solution possible. In his move today, he’s sought to reassure EU nationals of a future far removed from May’s brutal nationalistic games. And in Corbyn’s lifelong championing of workers’ rights, and redistribution of wealth, he can at last speak to the working-class heartlands freely of an inclusive and beneficial post-Brexit future.

While there can be shortcomings in Corbyn’s communication, and occasionally muted approach; criticisms can frequently seem unbalanced. His inability to shout about recent budgetary u-turns, for instance, made headlines over the actual climbdown itself. The time has surely come to focus on the severity of the alternative.

Throughout his leadership, Corbyn has been targeted by all corners of the press, with focus poured on his character over providing a real and important platform to explore his policies. When he refused mass media engagement he was dubbed cranky and weak, yet we’ve largely let May off the hook for dodging much-needed live debate. Written off by Westminster, mocked and condemned by the media. A principled voice fighting for equality, inclusion and fairness. Not much has changed in 30 years.

While we must hold his leadership to account, there is a sense that we, on the left are at times helping to fuel the massive Tory victory we apparently dread. So now is the time to remind ourselves, and others, who and what we’re up against. The "go-home illegal immigrants" vans circulated, and then pulled by May; her election u-turn, reinvention and uncompromising hard-Brexit approach. A party of callous, brutal decisions that have caused despair and plunged many into poverty. A snapshot of their comparative voting records alone should be enough to put the choice ahead of us into stark perspective.

And just to reiterate Corbyn’s largely swallowed, forgotten record during his rebranding as meaningless, lost and ineffectual. He was right on sad, regrettable wars; he passionately protested apartheid, championed workers rights and equal pay, and has consistently stood up for the NHS – against party line.

That’s a name, record and leader many will be proud to put an inked endorsement by on 8 June 2017. 

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