New Worries for Central Bankers

IMF Blog, March 1, 2023

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Publication: Finance and Development magazine issue introducing evolving challenges for central banks.
Author: Gita Bhatt.
Date: March 1, 2023.
Opening quote: “The job of the central bank is to worry.” — Alice Rivlin, vice chair of the Federal Reserve Board in the 1990s.
Core assertion: Inflation is now one of several worries; structural forces and a rapidly changing economic backdrop have complicated monetary policy and reduced maneuvering room.

IMF’s Gita Gopinath: Economists need improved tools after existing models missed the recent inflation surge.
Markus Brunnermeier (Princeton): Post-pandemic world characterized by higher inflation, lower growth, and more debt, yet central banks are using policies modelled for tepid inflation, low interest rates, and robust growth.
Greg Kaplan, Benjamin Moll, and Giovanni Violante: New economic models illuminate monetary policy’s influence on income and wealth distribution.

Masaaki Shirakawa (former governor, Bank of Japan): Time to reconsider the foundation and framework for monetary policy, with attention to national differences.
Raghuram Rajan (former governor, Reserve Bank of India): Advocates “less is more”—central banks should refocus on price stability while respecting financial stability.
Giancarlo Corsetti (European University Institute): Exceptional circumstances such as the pandemic may justify temporary monetary–fiscal cooperation, but never at the cost of independence.
Philip Lane (European Central Bank): Discusses euro area inflation and the challenge of shrinking the ECB’s balance sheet.
Lesetja Kganyago (South African Reserve Bank), Sukudhew Singh (former deputy governor, Bank Negara Malaysia), Leonardo Villar (Colombia’s central bank): Provide perspectives on fiscal–monetary interaction, foreign exchange intervention, and inflation targeting.
Karnit Flug (former governor, Bank of Israel): Emphasizes central bank accountability and transparency.

David G. Blanchflower and Andrew T. Levin (Dartmouth College): Recommend ways for central bankers to avoid groupthink, which can threaten credibility.
Michael Weber (University of Chicago): Surveys show improved monetary policy communications can shape expectations.

Monetary policy may need to be rethought given changing macroeconomic and structural conditions.
National differences matter; one-size-fits-all frameworks may be inadequate.
Trade-offs between price stability and financial stability need clearer prioritization.
Temporary coordination between monetary and fiscal authorities can be viable in exceptional circumstances, but preserving central bank independence is paramount.
Better models, communication strategies, and safeguards against groupthink are necessary to restore and maintain credibility.

Source: New Worries for Central Bankers, Finance and Development article by Gita Bhatt, March 1, 2023.