{
  "title": "Time for Change",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2023/03/pov-time-for-change-masaaki-shirakawa",
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  "summary": "It’s time to rethink the foundation and framework of monetary policy",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Argument: \"It’s time to rethink the foundation and framework of monetary policy.\"\n- Author: MASAAKI SHIRAKAWA, former governor of the Bank of Japan (2008–2013) and author of Tumultuous Times: Central Banking in an Era of Crisis.\n- Context: Recent high inflation \"not seen in 40 years\" followed a period when central banks were \"overwhelmingly concerned about low inflation\" and often described inflation as \"transitory.\""
    },
    {
      "heading": "Central failures and diagnostic themes",
      "content": "- Supply shocks and monetary policy:\n  - Triggering events—\"trade and production disruption owing to the pandemic and the war in Ukraine\"—were supply-side events but their inflationary impact \"varies according to preexisting financial conditions, which are in turn shaped by monetary policy.\"\n  - Conclusion: \"Central bankers, therefore, are not entirely blameless.\"\n- Misplaced emphasis on the zero lower bound and deflation risk:\n  - Jay Powell (August 2020 Jackson Hole) framed the risk: \"if inflation expectations fall below our 2 percent objective, interest rates would decline in tandem... we would have less scope to cut interest rates...\"\n  - Counter-evidence from Japan: despite reaching the zero lower bound earlier, Japan's GDP per person growth \"was in line with the G7 average from 2000... to 2012\" and \"growth of Japan’s GDP per working-age person was the highest among the G7 during the same period.\"\n- Limits of unconventional policy:\n  - Bank of Japan balance sheet expanded \"from 30 percent to 120 percent of GDP\" after 2013 with only \"modest\" impact on inflation and growth.\n  - Unconventional tools can be potent depending on timing; example: forward guidance can be \"too expansionary and inflationary\" when the economy is hit by a surprise shock."
    },
    {
      "heading": "Political and historical considerations",
      "content": "- Political naiveté and central bank independence:\n  - Flexible average inflation targeting that \"explicitly allowed inflation to overshoot the target\" contributed to delays in tightening.\n  - Difficulty highlighted: \"Is it possible in a democratic society for unelected central bankers to ask the government and legislators to trim the inflationary spending plans on which they were elected?\"\n- Great Moderation context:\n  - The \"Great Moderation\" (~20 years beginning mid-1980s) may have made central banking appear easier—\"the prevalent narrative of successful monetary policy... may have come down to good luck and fortuitous circumstances.\"\n  - Favorable supply-side factors then included \"the entry of developing and former socialist economies into the global market economy, rapid advances in information technology, and a relatively stable geopolitical environment.\"\n  - New headwinds: \"heightened geopolitical risk, rising populism, and the pandemic\" have disrupted supply chains and complicated unwinding of policy."
    },
    {
      "heading": "Rethinking the intellectual framework (three issues highlighted)",
      "content": "- 1) Reassess focus on deflation and the zero lower bound:\n  - Some economists propose a \"higher inflation target\" to allow \"less additional tightening\" and more margin of safety.\n  - Author's position: skeptical—additional room for rate cuts would not have materially altered the course after the global financial crisis; deflation is \"a threat posed by a critical breakdown of the financial system.\"\n  - Implication: central banks must attend to financial institutions and markets, not only macro aggregates like inflation and the output gap.\n- 2) Understand why central banks were forced into prolonged easing:\n  - Japan example: \"stagnant growth due to structural factors—notably a rapidly aging and shrinking population—was misconstrued as cyclical weakness,\" leading to decades of monetary easing.\n  - Warning: prolonged monetary easing (over \"10 years or more\") can have adverse effects on productivity through \"resource misallocation.\"\n  - Policy inference: \"monetary policy became a quick fix for structural problems that required more radical reform.\"\n- 3) Account for national differences in policy design:\n  - Labour- and social-contract differences affect inflation dynamics; example: Japan's \"long-term employment\" practice slows wage acceleration and thus inflation.\n  - Conclusion: \"This undermines the case for a one-number-fits-all inflation-targeting strategy.\"\n  - Monetary anchor: must be a \"firm commitment by the central bank to restrain inflation by monetary tightening and to be the lender of last resort\" rather than simply setting an inflation target."
    },
    {
      "heading": "Key findings and implications for policy",
      "content": "- Central banks should:\n  - Reevaluate the primacy of deflation risk and the policy emphasis arising from the zero lower bound narrative.\n  - Monitor financial imbalances in institutions and markets alongside macro indicators.\n  - Avoid using monetary policy as a substitute for necessary structural reforms.\n  - Recognize that prolonged easing can harm productivity via resource misallocation.\n  - Tailor frameworks to national circumstances—wage-setting practices and social contracts matter for inflation dynamics.\n- System-level takeaway:\n  - \"Inflation targeting itself was an innovation... There is no reason to believe it is set in stone.\"\n  - The time is \"ripe to reconsider the intellectual foundation on which we have relied for the past 30 years and renew our framework for monetary policy.\"\n\nMasaaki Shirakawa, F&D Magazine, March 2023\n\n---\n\n Content in this bundle\n\n- F&D March 2023: Time for Change\n  - F&D March 2023: Time for Change (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - F&D March 2023: Time for Change (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2023/03/pov-time-for-change-masaaki-shirakawa"
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    "Authors: Masaaki Shirakawa",
    "Published: March 1, 2023",
    "Argument: \"It’s time to rethink the foundation and framework of monetary policy.\"",
    "Author: MASAAKI SHIRAKAWA, former governor of the Bank of Japan (2008–2013) and author of Tumultuous Times: Central Banking in an Era of Crisis.",
    "Context: Recent high inflation \"not seen in 40 years\" followed a period when central banks were \"overwhelmingly concerned about low inflation\" and often described inflation as \"transitory.\"",
    "Supply shocks and monetary policy:",
    "Misplaced emphasis on the zero lower bound and deflation risk:",
    "Limits of unconventional policy:",
    "Political naiveté and central bank independence:",
    "Great Moderation context:",
    "1) Reassess focus on deflation and the zero lower bound:",
    "2) Understand why central banks were forced into prolonged easing:",
    "3) Account for national differences in policy design:",
    "Central banks should:",
    "System-level takeaway:",
    "**F&D March 2023: Time for Change**"
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