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How Should The Engagement of The Central Banks Be Regulated
How Should The Engagement of The Central Banks Be Regulated
How Should The Engagement of The Central Banks Be Regulated
term political influence when fulfilling their mandate of ensuring price stability. It is
largely undisputed that an independent central bank with a clearly defined mandate
is better able to keep inflation lower and more stable.
In the post financial crisis era, however, central banks in many countries have been
entrusted with powers and responsibilities, are going beyond their traditional
monetary policy mandates. Central banks have started acting in the areas of macro-
and micro-prudential supervision and crisis management. Also, while remaining
within their monetary policy mandate, some central banks adopted unconventional
monetary policy measures. Central banks have been over-stretching their mandates,
blurring or even crossing the line into fiscal and economic policy. Central banks are
accused of influencing the distribution of income and wealth and subsidising the
financial sector at the expense of society as a whole – policy areas which
traditionally require more democratic legitimacy and control. This has re-opened the
debate surrounding the legitimacy, and the precise scope, of central bank regulation.
Central banks play a crucial role in ensuring economic and financial stability within a
country. They conduct monetary policy to achieve low and stable inflation. Since the
late 1980s, inflation targeting has emerged as the leading framework for monetary
policy. Central banks in Canada, the euro area, the United Kingdom, New Zealand,
and elsewhere have introduced an explicit inflation target. Many low-income countries
are also making a transition from targeting a monetary aggregate to an inflation
targeting framework.
Considering the May 2016 thought leadership piece by PIMCO Global Economic
Advisor Joachim Fels, “The Downside of Central Bank Independence,” which argued
that independent bankers ran amok with “second-best interventions such as
quantitative easing (QE) or negative interest rate policy (NIRP), which distort financial
markets and can have severe distributive consequences. Also, examining the March
2016 proposal by Joseph T. Salerno, professor of economics at Pace University in
New York, called “A Modest Proposal to End Fed Independence.” Salerno pointed out
“a number of benefits of stripping the Fed of its quasi-independent status and
transforming it into a handmaiden of the Treasury.”
The global financial crisis showed that countries need to contain risks to the financial
system as a whole with dedicated financial policies.
There must be multilateral surveillance and policy papers to help improve global
outcomes by consulting on policy advice on how to avoid potential side effects from
the implementation of and exit from unconventional monetary policy.
There must be regular dialogue as part of bilateral surveillance. They should work
together on monetary policy action to achieve low and stable inflation, as well as on
establishing effective monetary policy and macroprudential policy frameworks.
Independence from government and the political process is obviously helpful when
the main enemy is high inflation, as it enhances a central bank’s credibility and helps
monetary policy makers do tough things without political interference. One example is
the “Paul Volcker recession” of the early 1980s, which was necessary to end the Great
Inflation.
But what happens when the main enemy is not inflation, but deflation, debt overhangs
and financial crises - in other words, the world since 2008?
Critics point out how the need or desire to defend their independence often hinders
central banks from swiftly addressing these problems in the most direct and effective
way (say, helicopter money or overt lender-of-last-resort action to underwrite troubled
financial institutions or sovereigns).
The main problems today are continuing disinflationary or even deflationary global
forces, public and private sector debt overhangs and the potential for new financial
crises. Central banks would be better equipped to counter the challenges in today’s
economy if they worked in close collaboration with and under the control of a
democratically legitimized government.
One argument for direct government involvement and responsibility is that many of
the decisions that are required to address today’s greatest problems have significant
distributive consequences and are thus in the realm of fiscal policy rather than
monetary policy. Think of the decision to save one major financial institution or let
another one go bust. Think of the decision to serve as lender of last resort to weak
sovereigns (several names spring to mind from the more recent eurozone crisis). Or
think of the decision to buy large amounts of public and/or private sector assets and
introduce negative interest rates to (try to) bring inflation back up to target. All of these
decisions are tough ones to make for an independent central bank that, if it decides to
make them, will be harshly criticized by those who lose out in the redistribution that
follows.
https://www.marketwatch.com/story/what-if-central-banks-were-no-longer-
independent-2016-05-19
For these reasons and several more, most serious policy analysts of the 20th century
considered independence a prerequisite for any effective central bank. Calls for reform
have only come after the recent and disastrous failures of contemporary central banks,
especially the big three: The Federal Reserve, European Central Bank (ECB) and
Bank of Japan (BOJ).
The second issue is performance. As Mohamed El-Erian wrote for Bloomberg in June
2016, "unconventional central bank policies are overstretched and near exhaustion."
More than a half-decade of desperate asset purchases and interest rate reductions by
central banks left the world with unprecedented debt loads, over-inflated asset
markets and rising inequality. The great concern of unchecked government control
over the money supply, namely unchecked expansion based on economically dubious
experiments, is now official policy for independent central banks.
Yellen, as with former Chairman Ben Bernanke, has maintained a public profile during
her tenure in an effort to appear more transparent. She regularly meets with the White
House and Congress, and often gives policy speeches and holds press conferences
to highlight Fed activity.
https://www.bloomberg.com/view/articles/2017-08-07/maybe-central-banks-are-too-
independent