Credit: Pete Reynolds

New Worries for Central Bankers

This issue of F&D explores how inflation dynamics have forced a re-think of how central banks conduct monetary policy

“The job of the central bank is to worry.” That’s how Alice Rivlin, vice chair of the Federal Reserve Board in the 1990s, described the work of monetary policymakers. Back then, central bankers had one main concern: to keep inflation in check.

Now, inflation is one of several worries facing central banks. A rapidly changing economic backdrop leaves less maneuvering room for policy, while structural forces—from deglobalization to climate change, aging populations, and the advent of digital money—have greatly complicated the underlying policy challenge. Central bank mandates and even their independence are under increasing political pressure. These new forces and others raise questions about how monetary policy may have to change going forward.

In our latest issue of Finance and Development magazine, distinguished contributors offer insights on how central bankers can navigate an increasingly complex world.

The IMF’s Gita Gopinath details how economists need improved tools after existing models missed the recent inflation surge. Masaaki Shirakawa, former governor of the Bank of Japan concurs, noting that it’s time to reconsider the foundation and framework for monetary policy, paying attention to national differences.

Princeton's Markus Brunnermeier argues that in a post-pandemic world with higher inflation, lower growth, and more debt, central banks are still pursuing policies modelled for the days of tepid inflation, low interest rates, and robust growth.

How, then, should central bank frameworks and mandates change? Less is more, says Raghuram Rajan, former governor of the Reserve Bank of India. He explains why central banks should refocus on their primary role, price stability, while respecting financial stability. For Giancarlo Corsetti of the European University Institute, exceptional circumstances such as the pandemic may call for monetary and fiscal authorities to work together—but only temporarily and never at the cost of their independence. 

David G. Blanchflower and Andrew T. Levin of Dartmouth college suggest ways central bankers can avoid the temptation of groupthink, which can threaten their credibility. Academics Greg Kaplan, Benjamin Moll, and Giovanni Violante show how new economic models help us understand monetary policy's influence on income and wealth distribution. Using a series of surveys, University of Chicago’s Michael Weber reveals how better monetary policy communications can shape expectations.

Elsewhere in the issue, we hear from other central bankers. The European Central Bank’s Philip Lane discusses euro area inflation and the challenge of shrinking its balance sheet. Lesetja Kganyago, governor of the South African Reserve Bank, Sukudhew Singh, former deputy governor at Bank Negara Malaysia, and Leonardo Villar, governor of Colombia’s central bank provide their take on the interaction of fiscal and monetary policy, foreign exchange intervention, and inflation targeting, respectively. In a wide-ranging interview, Karnit Flug, former governor of the Bank of Israel, and its first female head, talks about the importance of central bank accountability and transparency.

Economics as a discipline is evolving in a highly uncertain era—one that demands reflection on models, customs, and assumptions. I hope you find this issue thought-provoking and one that helps spark further debate.

Thank you, as ever, for reading us.