Saturday, March 5, 2016

Against Independent Central Banks: The Short Version

Simon Wren-Lewis appeals to the history of the past few decades to develop an argument for making central banking less independent.  I think there’s a simpler way to put it: good macroeconomic policy typically requires coordination between monetary and fiscal policy.  This was true in the early-mid 1980s in the US when very expansive fiscal policy combusted with tight monetary policy to drive up the value of the dollar and require a Plaza Accord to repair the damage.  It’s true today, as SWL says, to facilitate some sort of helicopter to fly us out of chronically deficient demand.  This is old-fashioned Keynesian economics, the sort I learned in the 1970s, and it still makes sense.

Incidentally, one of the arguments for ICB’s that SWL cites has never impressed me much, that it counteracts the pro-inflation bias of populist politicians.  If the rest of the political economic landscape were perfectly neutral with respect to competing policy objectives, there might be a point. But in the world we actually live in there is a politically powerful financial sector in every country demanding hard money at each moment of the business cycle (except of course the crash).  This lends a contractionary bias to monetary policy under systems in which central banks are insulated from other political pressures.  Obviously, reducing CB independence is not a solution in itself, because politics is often misguided, but if there were truly a soft money bias from electoral pressures, it might take us closer to neutrality overall.

3 comments:

Unknown said...

The only "coordination" of fiscal and monetary policy that seems necessary is for governments to ramp up expenditures with future benefits and present marginal costs during recessions (=low real borrowing rates and marginal costs less than market prices, i.e., unemployed resources). Whether you call this old fashioned Keynesian economics or not is a matter of taste.

Bruce Wilder said...

You are too polite.

Central bank "independence" interpreted as independence from populist political pressure is clearly not a desirable property, except from a corrupt perspective. The one thing a sensible monetary policy cannot survive is leaving a central bank to the tender mercies of the bankster community, the constituency that a central bank must regulate in the public interest, if it is to serve any function other than as handmaiden to the enslavement of peons.

That Simon Wren-Lewis labors within a theoretical framework that doesn't adequately contemplate the multifarious ways in which a Central Bank must regulate the banking and payment system is simply evidence that he is a pompous ignoramus underneath the academic robes. "Central bank independence" is code for such corrupt piety among economists, and we should do nothing to encourage accepting even for a moment the pretence of neutrality or competence among these dignified toadies to plutocracy.

That said, I think it is possible to make a political science point about the usefulness of isolating certain monetary policy decisions in a political body, which, unlike a legislature cannot be rolling logs, as they say. That a Central Bank and a Treasury department must cooperate in executing the operational decisions that manage a currency, a payments systems and keeps a marketable national debt a useful means of financial hedging and a benchmark for a "zero-risk" yield curve -- well, that is arguably a technical point worth having an academic explicate.

That kind of strategic isolation in structuring institutional decision-making in the interest of maintaining a modicum of integrity and technical transparency should never be confused with pious and hypocrtical claims about "central bank independence". In fact, if Simon Wren-Lewis were minimally competent, he would be making a distinction between strategic isolation and political capture, political capture and political responsibility.

Biagio Bossone said...

Good post! You might be interested in reading this

http://www.economonitor.com/blog/2015/09/helicopter-money-central-bank-independence-and-the-unlearned-lesson-from-the-crisis/