{ "title": "Less Is More", "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan", "canonical": "https://www.imf.org/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan", "overlayPath": "/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan/index.md", "summary": "More focused, less interventionist central banks would likely deliver better outcomes", "sections": [ { "heading": "Thesis and overview", "content": "- More focused, less interventionist central banks would likely deliver better outcomes.\n- Central banks should refocus on their primary mandate of combating high inflation while respecting a secondary mandate of maintaining financial stability." }, { "heading": "Case for central bankers", "content": "- Pandemic and unexpected shocks:\n - The pandemic was unprecedented and its consequences for the globalized economy very hard to predict.\n - Vladimir Putin went to war in February 2022, disrupting supply chains and sending energy and food prices skyrocketing.\n- Frameworks and beliefs constrained action:\n - The Federal Reserve changed its framework during the pandemic to be less reactive to anticipated inflation and keep policies more accommodative for longer.\n - That framework was appropriate for an era of structurally low demand and weak inflation but was ill-suited as inflation began to rise.\n- Political legitimacy limitations:\n - With governments having spent trillions to support economies, employment recovering from terrible lows, and inflation barely noticeable for over a decade, preemptive rate rises lacked public legitimacy.\n- Summary point:\n - Central bank hands were tied by recent history, adopted frameworks that favored accommodation, and the politics of the moment." }, { "heading": "Case against central banks", "content": "- Fiscal and financial dominance emerged:\n - Long periods of low interest rates and high liquidity prompted increases in asset prices and leveraging across government and private sectors.\n - Central banks bought government debt financed by overnight reserves, shortening the maturity of financing for governments and central banks’ consolidated balance sheets.\n - Fiscal considerations already weigh on some central banks (example: the European Central Bank and concerns about “fragmentation”).\n- Private sector leverage and liquidity dependence:\n - Commercial banks financed reserves largely with wholesale demand deposits, shortening the maturity of their liabilities.\n - Banks wrote liquidity promises (committed lines of credit, margin support) that are hard to unwind as central banks shrink balance sheets.\n - UK pension turmoil in October 2022 illustrated liquidity-dependent private sector dynamics, defused by central bank intervention and government backtracking.\n- Asymmetric central bank action and distributional costs:\n - Central banks may be quicker to ease policy when asset prices fall but more reluctant to tighten when asset prices bubble, following a long-standing asymmetry.\n - High asset prices and subsequent losses when prices normalize can harm households, pension funds, and the relatively poor.\n- External spillovers:\n - Policies of core reserve countries affect the periphery via capital flows and exchange rates, forcing periphery central banks to react even if actions are unsuitable domestically.\n- Summary point:\n - Central banks’ past unconventional and asymmetric policies contributed to imbalances that constrained their ability to fight the higher-inflation regime." }, { "heading": "Mission creep and mandates", "content": "- Limits of expanding central bank roles:\n - Central banks are not the obvious institutions to combat climate change or promote inclusion; often they have no mandate to do so.\n - Central bank tools have limited effectiveness in areas like climate change or inequality and may influence effectiveness on primary mandates (example: inclusion focus potentially holding back rate increases).\n - Directly combating climate change or inequality is best left to elected governments.\n- Regime-dependent framework contradiction:\n - Low-inflation regime: may require commitment to being more tolerant of inflation to raise inflation (Paul Krugman’s “rationally irresponsible” idea).\n - High-inflation regime: requires strong commitment to eradicate inflation early—“when you stare inflation in the eyeballs, it is too late.”\n - A framework that credibly commits in one regime may undermine commitment in the other; central banks cannot easily shift frameworks without losing commitment power." }, { "heading": "Choosing frameworks and financial stability", "content": "- Recommended emphasis:\n - Reemphasize the mandate to combat high inflation using standard tools such as interest rate policy.\n - If inflation is too low, tolerate it unless it collapses into a deflationary spiral; avoid tools like quantitative easing that distort credit, asset prices, and liquidity and are hard to exit.\n- Financial stability role:\n - Central banks may need a stronger mandate to help maintain financial stability because prolonged low inflation episodes can follow financial crises and monetary tools contribute to asset-price-driven leverage.\n - Macroprudential supervision remains important but has been insufficient so far; better coverage of the nonbank shadow financial system is needed.\n - Monetary policy “gets into all the cracks” and with that power should come some responsibility.\n- External dialogue on spillovers:\n - A dialogue on spillovers should begin at the BIS in Basel and then involve the IMF and government representatives to discuss central bank mandate changes in an integrated world.\n- Summary point:\n - Refocusing central banks on combating high inflation and maintaining financial stability will likely produce fewer spillovers and better outcomes." }, { "heading": "Policy recommendations and concluding assessment", "content": "- Principal recommendations:\n - Refocus central banks on primary mandate of combating high inflation.\n - Respect secondary mandate of maintaining financial stability, including better macroprudential coverage of the financial system and attention to the nonbank shadow sector.\n - Avoid expanding mandates into climate change and inequality; leave direct action to elected governments while assessing implications of these issues for monetary and financial stability objectives.\n - Promote apolitical international dialogue (BIS, then IMF) on spillovers and possible mandate adjustments.\n- Final assessment:\n - More focused and less interventionist central banks would probably deliver better outcomes than the high-inflation, high-leverage, low-growth world described.\n - For central banks, less may indeed be more.\n\nRaghuram Rajan, \"For Central Banks, Less Is More\", F&D Magazine, March 2023.\n\n---\n\n Content in this bundle\n\n- F&D March 2023: Central Banks; Less is More\n - F&D March 2023: Central Banks; Less is More (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - F&D March 2023: Central Banks; Less is More (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan" } ], "bullets": [ "[Markdown version](/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan/index.md)", "[Structured JSON version](/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan/index.json)", "[Bundle manifest](/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan/bundle-manifest.json)", "Authors: RAGHURAM RAJAN", "Published: March 1, 2023", "More focused, less interventionist central banks would likely deliver better outcomes.", "Central banks should refocus on their primary mandate of combating high inflation while respecting a secondary mandate of maintaining financial stability.", "Pandemic and unexpected shocks:", "Frameworks and beliefs constrained action:", "Political legitimacy limitations:", "Summary point:", "Fiscal and financial dominance emerged:", "Private sector leverage and liquidity dependence:", "Asymmetric central bank action and distributional costs:", "External spillovers:", "Summary point:", "Limits of expanding central bank roles:", "Regime-dependent framework contradiction:", "Recommended emphasis:", "Financial stability role:", "External dialogue on spillovers:", "Summary point:", "Principal recommendations:", "Final assessment:", "**F&D March 2023: Central Banks; Less is More**" ], "related": [ { "title": "F&D March 2023: Central Banks; Less is More", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/fandd/article/2023/march/rajan-central-banks-less-more.pdf", "summary": { "path": "/-/media/files/publications/fandd/article/2023/march/rajan-central-banks-less-more.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/files/publications/fandd/article/2023/march/rajan-central-banks-less-more.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan/index.md", "json": "/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan/index.json", "bundleManifest": "/en/publications/fandd/issues/2023/03/central-banks-less-is-more-raghuram-rajan/bundle-manifest.json" }, "generatedAtUtc": "2026-09-15T18:22:47.904Z" }