Δευτέρα, 20 Φεβρουαρίου 2017

Central bank independence is losing its lustre


19/2/2017

By Wolfgang Münchau

Monetary policy involves trade-offs that are fundamentally political in nature

You would struggle to find a more potent symbol of the changes that await our liberal economic order than a letter written by Patrick McHenry to Janet Yellen. The vice-chairman of the US House of Representatives financial services committee questioned the right of the chair of the Federal Reserve to negotiate financial stability rules “among global bureaucrats in foreign lands without . . . the authority to do so.” Rarely has opposition to financial globalisation been so concisely expressed.

The letter raises two questions. Do the political conditions for central bank independence remain in place in the US and globally? If so, what should its scope be?

My answer to the first question is: yes and no. The conditions for central bank independence are no longer in place in all countries, and where they are still in place, one should ensure that independence is strictly confined to the bank’s core mandate. This differs across jurisdictions. The Federal Reserve Act defines the Fed’s role as one of maximising employment, securing price stability and moderating long-term interest rates. The primary mandate of the European Central Bank is to achieve price stability, while the Bank of England targets a headline rate of inflation.

We should remember that central bank independence is not the natural order of things. Most central banks used to be government agencies until not too long ago, and were subject to political instructions, usually from the finance minister. They became independent after a period of price instability in the 1970s and 1980s produced a consensus in many countries about what a central bank should do. If almost everyone agrees on the goal of a technically complex policy, then, so the argument in favour of central bank independence goes, we are better off in leaving the implementation of the policy to experts. The primary argument for central bank independence, then, is not that it delivers better results as such, but that we agree on what it should do. In most countries this consensus still holds, including in the US. But Mr McHenry’s letter is also telling us that support for a broad definition of central bank independence is not as strong as it used to be.

Once the consensus about the goals of monetary policy breaks down, the notion of central bank independence becomes harder to defend on democratic grounds. The US situation differs from Europe’s in one important respect: the monetary policy goal is much more broadly defined. On one level, that makes it easier to defend independence. The goal is so broad that it is hard to disagree with it. But what if the goals are in conflict? I agree with Otmar Issing, a former chief economist of the ECB, that the independence of a central bank is politically justifiable only when the central bank targets a single policy variable — price stability in the case of the ECB. The presence of two goals implies that trade-offs have to be made, which is a fundamentally political task.

Central bank independence requires more than just a broad agreement on the goal itself. What is also required is a degree of agreement as to what price stability, for example, actually means. This is a particularly contentious issue in the eurozone, where Germany has never accepted the ECB’s target of an annual headline inflation of “close to but below 2 per cent”.

An inflation target of around 2 per cent is nowadays widely accepted among central bankers. But in the decades preceding the golden age of global central bank independence economists quarrelled about trade-offs between unemployment and inflation. Since then, the profession converged on a new set of beliefs. A low but firmly positive rate of inflation is these days considered consistent with maximum employment. This consensus was famously described by Olivier Blanchard, a French economist, as a divine coincidence. But confidence in these economic models is as weak as the support for independent central banks. They could sink together.

Where does this leave central banks’ participation in global forums staffed by the “bureaucrats in foreign lands” Mr McHenry railed against? The past 10 years taught us that financial regulation is primarily a political, not a technical, issue. It matters how we regulate banks, what capital requirements we impose and what we do when banks fail. The role of central banks should be to advise nations and provide technical support.

So whether Mr McHenry is right or wrong is beside the point. The mere fact that a letter such as his was written tells us that the foundations of central bank independence are not as strong as they were.

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