## Embrace Debate

## Source details

**Canonical URL:** [Embrace Debate](https://www.imf.org/en/publications/fandd/issues/2023/03/trenches-embrace-debate-karnit-flug)

## Other formats

- [Markdown version](/en/publications/fandd/issues/2023/03/trenches-embrace-debate-karnit-flug/index.md)
- [Structured JSON version](/en/publications/fandd/issues/2023/03/trenches-embrace-debate-karnit-flug/index.json)
- [Bundle manifest](/en/publications/fandd/issues/2023/03/trenches-embrace-debate-karnit-flug/bundle-manifest.json)

## Bibliographic details
- Authors: NICHOLAS OWEN
- Published: March 1, 2023

---

### Accountability, transparency, and public narrative
- Central banks are coming under "unprecedented scrutiny" while addressing inflation and global recession.
- "I understood then there is no such thing as private remarks at meetings of the government," — lesson on controlling the public narrative rather than having remarks "taken out of context to serve someone else’s agenda."
- Recommendations and practices:
  - Be transparent and professional in analysis.
  - Be active in public debate on the basis of high-quality research.
  - Accountability can be advanced by requirements for transparency, expert evaluations, and lively public debate.

### Historical inflation context and institutional reforms
- Israel's peak inflation in 1984: "prices had increased by 445 percent."
- Fiscal and debt context in 1984:
  - "huge public deficit of about 15 percent of GDP."
  - "Debt was 280 percent of GDP."
- Institutional change: amendment of the Bank of Israel law (the "no printing clause") prevented the central bank from financing government deficits; central bank independence differs markedly from the 1980s.
- Political pressures and risks:
  - Some Knesset members proposed initiatives such as exempting single homeowners from increases in mortgage interest rates.
  - Such initiatives may:
    - Make monetary policy less effective through self-restraint or altered expectations.
    - Affect expectations even if policy unchanged, reducing policy effectiveness.

### Lessons on monetary policy, independence, and inflation bias
- Central bank independence is crucial to reach an inflation goal and to counteract political inflation bias.
- Historical inflation bias: politicians in the 1970s and ‘80s believed in tolerating "a little more inflation" for higher activity and employment; this proved difficult to control and could trigger spirals of rising inflation expectations and high welfare costs.
- On whether central banks erred with low rates and QE:
  - Monetary policy response to the global financial crisis "was broadly correct" and "saved the world from a much deeper and longer recession."
  - Importance of leadership and historical lessons (e.g., Ben Bernanke).
  - Use of macroprudential policies in some places to mitigate asset-market risk from very low rates; example: Israel introduced mortgage-market restrictions to limit excessive risk buildup.

### Policy sequencing after COVID-19 and drivers of recent high inflation
- Post-COVID-19 response combined large monetary and fiscal expansion; Karnit Flug's view:
  - "the withdrawal of the extreme fiscal and monetary support came too late."
  - Recovery was very strong, but some governments remained extremely expansionary while monetary policy stayed extremely accommodative.
  - Supply constraints (factory closures in China and elsewhere, and the war in the Ukraine) met strong demand, leading to rapid inflation.
  - There was a delay in recognizing that demand played an important role, not only supply shocks, necessitating faster withdrawal of the expansion that "has still not been achieved everywhere."

### Research, policymaking, and institutional roles
- Flug’s career and approach:
  - Managed the research department at the Bank of Israel for 10 years; research background informed policy decisions.
  - Research helps identify what questions models can answer and the limitations of model-based answers.
  - A research background aids in assessing when to use models versus basic theory or simple analysis of recent data.
- Institutional peculiarity: The Bank of Israel governor is also economic advisor to the government (based on the original 1954 central bank law), a role that creates friction with the political system and makes the governor's advice "very public."

### Leadership, gender, and representation
- Karnit Flug was Israel's first female central bank governor; she noted:
  - She was the first governor "from the ranks," having started as a young economist at the bank and risen to the top.
  - At the Bank of Israel she "didn't sense that being a woman interfered with my career advancement."
  - She served as a role model, frequently asked about being the first female governor when meeting students.
  - On international meetings: she was sometimes "the only woman in a room with 35 or 40 male governors" but saw more women attending over time.

*Interview with Karnit Flug, F&D Magazine, March 2023.*

---

## Content in this bundle

- **Embrace Debate**
  - [Embrace Debate (Markdown version)](/-/media/files/publications/fandd/article/2023/march/trenches-karnit-flug.pdf.md){rel="alternate" type="text/markdown"}
  - [Embrace Debate (PDF)](/-/media/files/publications/fandd/article/2023/march/trenches-karnit-flug.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/fandd/issues/2023/03/trenches-embrace-debate-karnit-flug_