Central bankers are the modern storytellers
Anyone who’s followed TVHE for a while will enjoy Gillian Tett’s discussion of the skills needed by central bankers:
Rather than operating the controls, moreover, central bankers also try to control economic outcomes by using words, not merely to influence price and interest rate expectations but to shape the mood. Thus the seemingly dry ritualistic texts that are issued each month – and supplemented by sober speeches – no longer merely describe policy; they are creating it too. Words are the weapon.
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[It] suggests that we all need to spend more time reflecting on the implicit social contract and cultural messages in central bank statements. …The next Fed chair needs to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re) create trust and persuade us all.
First para yes definitely.
Second para is going a bit far. Central banks are an arm of government that are given a very specific mandate – apply their tools to broadly to meet some implied desire of what they think the social contract is, and they become an unelected body trying to shape the actions of individuals without a mandate. Tis a fine line to tread …
I’m not sure about the ‘specific mandate’. They have to worry about price stability, the output gap, financial stability, and sometimes the exchange rate. The expansion of central banks’ role requires them to engage with social debates far more than previously and it is unrealistic to think that their pronouncements won’t shape those debates.
Hmmmm. This all sounds like mission creep – I’ll be honest and say I fundamentally disagree that we should have an non-democratically elected central planner, oppps bank, doing these things.
Having inflation targeting and an independent central bank is simply a way for government to tie its own hands and solve a time inconsistency problem – the extension to macroeconomic stability given the time lags in policy setting, and the implied neutral effect on income distributions, was justifiable. Having direct regulation of banks also seems fair.
But outside of these areas, and the fuzzy lines besides them, things get strange – and we start to mix distributional goals (which are the purview of discretionary, democratically influenced, central government) with these other things. I am not a fan.
I understand your feeling but central banks are waaaay beyond that already. They have enormous discretion in their actions and must have some welfare function in mind when they decide policy. Frankly, flexible inflation targeting and financial stability both require the bank to exercise judgment, which takes them well beyond rule enforcement. I don’t see how you can support those policies and still claim that they are not making policy and shouldn’t need to consider the welfare function.
They consider a form of welfare function – but it needs to be for a particular set of shocks.
I agree that movements in the financial stability that are not rule based start to head too far – and I’ve noted that concern here for years. But the issue that the more we increase the scope of central banks, the less effective their core role becomes, is still a view that is followed – and one I think we need to be more careful about throwing out 🙂