First published: Financial Times, 24/02/2014
Focus should be on building a more robust financial system
Central banks have been on the back foot recently. The Federal Reserve has been criticised for its tapering strategy. Forward guidance in the US and UK has become a little discredited. Higher policy rate expectations are played down but are no longer an academic issue. The European Central Bank’s unused lender-of-last-resort policy tool for sovereign governments may have been rendered unusable.
Controversially, perhaps, we should welcome these developments. They could help us to stop obsessing about the capacity of central banks alone to address our economic challenges, and, more generally, to focus on building a more robust financial system.
There are no constants in central banking, and we should embrace the opportunity for change. Under Bretton Woods, central banks had to obey the rules dictated by fixed exchange rates. After 1971, they made up their own rules, until the necessity of fighting inflation. In the credit boom, they were part of the flawed consensus that economies would be self-correcting if only low, headline inflation targets were respected….“more:”