New Worries for Central Bankers
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- Authors: GITA BHATT
- Published: March 1, 2023
Overview
- Title: New Worries for Central Bankers
- Author/role: GITA BHATT, F&D editor-in-chief.
- Date: March 2023
- Read time note in source: Less than a minute(0 words) Read
- Opening quote preserved exactly: “The job of the central bank is to worry.” — Alice Rivlin, vice chair of the Federal Reserve Board in the 1990s.
Emerging challenges for monetary policymakers
- Inflation is no longer the sole concern; it is one of several worries facing central banks.
- Structural forces complicating the policy challenge:
- deglobalization
- climate change
- aging populations
- the advent of digital money
- A rapidly changing economic backdrop reduces maneuvering room for policy.
- Central bank mandates and independence are under increasing political pressure.
- These new forces raise questions about how monetary policy may have to change going forward.
Contributions and key insights in this Finance & Development issue
- Gita Gopinath (IMF):
- Economists need improved tools after existing models missed the recent inflation surge.
- Masaaki Shirakawa (former governor, Bank of Japan):
- Time to reconsider the foundation and framework for monetary policy, paying attention to national differences.
- Markus Brunnermeier (Princeton):
- 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.
- Raghuram Rajan (former governor, Reserve Bank of India):
- “Less is more”: central banks should refocus on their primary role, price stability, while respecting financial stability.
- Giancarlo Corsetti (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 (Dartmouth College):
- Suggest ways central bankers can avoid the temptation of groupthink, which can threaten credibility.
- Greg Kaplan, Benjamin Moll, and Giovanni Violante (academics):
- New economic models show how monetary policy influences income and wealth distribution.
- Michael Weber (University of Chicago):
- Series of surveys reveal how better monetary policy communications can shape expectations.
- Other central banker perspectives included:
- Philip Lane (European Central Bank): euro area inflation and the challenge of shrinking the balance sheet.
- Lesetja Kganyago (South African Reserve Bank), Sukudhew Singh (former deputy governor, Bank Negara Malaysia), Leonardo Villar (Colombia’s central bank): discuss fiscal-monetary interactions, foreign exchange intervention, and inflation targeting.
- Karnit Flug (former governor, Bank of Israel): highlights the importance of central bank accountability and transparency.
Policy implications and themes for future monetary frameworks
- Need to improve economic models and tools to better capture inflation dynamics and structural shifts.
- Reconsideration of monetary policy foundations and frameworks with sensitivity to national differences.
- Re-emphasis on price stability as the core mandate, while maintaining attention to financial stability.
- Limited, temporary coordination between monetary and fiscal authorities may be warranted under exceptional circumstances, but should not undermine central bank independence.
- Guard against groupthink within central banking communities to preserve credibility.
- Incorporate distributional effects of monetary policy into analysis and design.
- Strengthen monetary policy communications to shape public expectations effectively.
- Increase transparency and accountability of central banks.
Final editorial note
- The editor frames economics as a discipline evolving in a highly uncertain era that demands reflection on models, customs, and assumptions, and expresses hope the issue sparks further debate.
F&D Magazine — New Worries for Central Bankers — GITA BHATT — March 2023
Content in this bundle
- F&D March 2023: New Worries for Central Bankers
- F&D March 2023: New Directions for Monetary Policy