For me, the independence of central banks is one of the greatest institutional changes that has taken place in the past 30 years when it comes to “economic management”. This independence has allowed central banks to clearly articulate goals and ensure that the arbitrary monetary distortions that previously occurred no longer take place – governments can not use storage, and central banks are generally less likely to accidentally tighten or loosen conditions inappropriately.
But this independence, and this view that a central bank provides some central “management” role has led an increasing number of writers to believe that the central bank truly controls the economy. Not just in a broad sense, but there is a belief that a central bank can meet many disparity micro goals, changing the structure of the economy, controlling firms pay structures, changing inequality.
There was a time not so long ago when it was clearly recognised that STRUCTURAL issues were the responsibility of Treasury – if there was a clear defined market/institutional/government failure to deal with.
But now an increasing number of these broad structural issues are being blamed on central banks, there is an increasing belief that by changing an interest rate the Bank can separately determine a myriad of clear “good and bad” potential outcomes – and people appear to get frustrated because they feel that central banks are purposefully making things worse.
But this is not true, monetary policy is inherently cyclical, financial stability issues are just that … issues of financial stability. If there are failures in the more general economy it is due to either the imperfection of the world we live in or the inappropriateness of government policy settings (in either direction) – it is not due to the central bank setting the wrong interest rate, or making the wrong comment in their latest statement.
I just hope this fundamental lesson will be remembered before people decide to start diluting the independence of, or stretching the role of, our central banks.
Update: This issue is discussed more sensibly on the Money Illusion. Choice quote:
Monetary policy should be boring, as it is in Australia; not exciting, as it is in the US and Japan. Most of my readers think I am advocating use of monetary policy as a tool. Most think I want it to be exciting. Nothing could be further from the truth.