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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Green party calls on Labour, Lib Dems, and Plaid Cymru to form a "progressive alliance" next election

Will Jeremy Corbyn, Tim Farron and Leanne Wood agree to meet for talks?

The Green party leadership have called upon Labour, the Lib Dems and Plaid Cymru to work together to challenge the Tories at the next election. In an open letter, the Green leaders stress the exceptional circumstances occassioned by the vote to leave the EU:

“In a spirit of openness and transparency, we are writing to you as leaders of parties which oppose Brexit, to invite you to a cross-party meeting to explore how we best rise to the challenge posed by last week’s vote to Leave the EU.  

“We have a UK Government in chaos, an economy facing a crisis and people up and down the country facing serious hardship. There is an urgent need to make a stand against any austerity and the slashing of environmental legislation, human and workers’ rights, that may come with Brexit. 

“With the growing likelihood of an early General Election, the importance of progressive parties working together to prevent the formation of a Tory-UKIP-DUP government that would seek to enact an ultra-right Brexit scenario is ever more pressing.

Caroline Lucas shot down a rumour that she would be joining Corbyn’s shadow cabinet. But her party has decided to call for a progressive alliance and an early general election. 

Key to such cross-party talks would be the demand for electoral reform, as the leader Natalie Bennett added in a statement:

“Central to such a progressive alliance would be a commitment to proportional elections for the House of Commons and an elected second chamber.”

The call for a more plural politics follows a post-referendum surge in Green party membership, with up to 50 people joining per hour.

Here’s the letter in full:

Open letter to: Jeremy Corbyn, Tim Farron, Leanne Wood on behalf of Green Party of England and Wales,

In a spirit of openness and transparency, we are writing to you as Leaders of parties which oppose Brexit, to invite you to a cross-party meeting to explore how we best rise to the challenge posed by last week’s vote to Leave the EU.  

Britain is in crisis and people are scared about the future. Never have we had a greater need for calm leadership to be shown by politicians.  

We have a UK Government in chaos, an economy facing a crisis and people up and down the country facing serious hardship. There is an urgent need to make a stand against any austerity and the slashing of environmental legislation, human and workers’ rights, that may come with Brexit. 

With the growing likelihood of an early General Election, the importance of progressive parties working together to prevent the formation of a Tory-UKIP-DUP government that would seek to enact an ultra-right Brexit scenario is ever more pressing.

This is an opportunity to recognise that a more plural politics is in both the Left’s electoral and political interests. This crisis exposes the absurdity of our first past the post electoral system.  Just 24 per cent of those eligible to vote elected the government that called the referendum. The only fair way to proceed is to have a proportional voting system where people can back the politicians who they believe in, rather than taking a gamble and not knowing who they will end up with.  

The idea of a progressive alliance has been floated for several years, and proposals have once again been put forward in the context of the current crisis.  We believe that the time has come to urgently consider such ideas together in the context of a Westminster Government. We recognise the very different political situation in Scotland, given the strongly pro-EU majority there. We hope that co-operation between progressive parties their can ensure that this mandate is respected, and we will support them to keep all options open.

We look forward to your response,

Natalie Bennett, Leader of The Green Party of England and Wales

Steven Agnew MLA, Leader of the Green Party of Northern Ireland

Alice Hooker-Stroud, Leader of Wales Green Party

Caroline Lucas, MP for Brighton Pavilion

India Bourke is the New Statesman's editorial assistant.