The Global Battle Over Central Bank Independence

Transcription

1 The Glbal Battle Over Central Bank Independence James Bullard President and CEO, FRB-St. Luis 4 January 2013 NABE Panel Discussin: Federal Reserve Independence in the Aftermath f the Financial Crisis: Shuld We Be Wrried? AEA/ASSA Annual Meeting San Dieg, Califrnia Any pinins expressed here are my wn and d nt necessarily reflect thse f thers n the Federal Open Market Cmmittee.

2 This talk Financial crisis aftershcks have partially brken dwn the cnsensus n the wisdm f central bank independence. T the extent that central bank independence is weakened glbally, macrecnmic stabilizatin plicy will nt be executed as well in the future as it has been since the mid- 1980s. This suggests mre macrecnmic vlatility ahead. Fiscalizatin f mnetary plicy will tend t cmplicate the plicymaking prcess substantially. Live example: The ECB s OMT prgram.

3 Cnsensus Weakening

4 What is the cnsensus n central bank independence? Effective macrecnmic stabilizatin plicy has t be implemented in a timely manner in reactin t macrecnmic shcks. Example: Taylr-type plicy rules. Fiscal plicy adjustments thrugh tax, spending, and brrwing plicy tend t be slw and must be carefully negtiated. Mnetary plicy can be implemented in a timely and techncratic manner. Hence the cnventinal wisdm: Fcus fiscal plicy decisins n the medium and lnger run. Delegate mnetary plicy t an independent authrity.

5 Why is this the cnsensus? The gal is t have an effective macrecnmic stabilizatin plicy. If mnetary plicy is nt delegated t an independent authrity, then it t becmes part f the slw and cmplicated negtiatins assciated with fiscal plicy. The sciety wuld be left withut a way t make timely plicy adjustments in reactin t macrecnmic shcks. The result wuld be mre macrecnmic vlatility. The cnsensus therefre suggests that macrecnmic utcmes will be better with an independent central bank.

6 Why is the cnsensus breaking dwn? The central banks in the G-7 encuntered the zer lwer bund n nminal interest rates. This led many t talk abut the need fr fiscal authrities t step up and cnduct macrecnmic stabilizatin plicy. Hwever, the usual plitical hurdles asserted themselves and led t a hdgepdge f fiscal plicy respnses nt particularly well-timed with macrecnmic events.

7 Plicy rates Surce: Haver Analytics. Last bservatin: Nvember 2012.

8 Aside: The zer lwer bund and fiscal prgrams The binding ZLB des nt necessarily imply a need fr fiscally-riented macrecnmic stabilizatin plicy. Central banks have cnducted stabilizatin plicy effectively even while at the zer bund. Tw key tls: QE prgrams and frward guidance. Evidence: Inflatin has generally stayed near target instead f falling dramatically. The NK literature suggests that an effective mnetary plicy makes fiscal stabilizatin plicy irrelevant, and that frward guidance keeps mnetary plicy effective even at the ZLB. * * See: J. Bullard, 2012, Death f a Thery, FRB f St. Luis Review, March/April, 94(2), pp

9 Fiscal Respnses

10 The central bank and fiscal plicy Nevertheless, many see fiscal stabilizatin plicy as desirable in the current cntext. One idea: Suggest that the central bank take actins that are cumbersme t accmplish thrugh a demcratically-elected bdy. This may be seen as ne way t get the relatively speedy mnetary plicy decisin-making int a fiscal plicy cntext.

11 Slwer, Negtiated Decisin-Making This is a creeping pliticizatin f mnetary plicy. Sme central bank independence is lst since the mnetary authrity is taking actins at the behest f ther plicy actrs. Mnetary plicy decisins then becme wrapped up with fiscal plicy decisins, slwing dwn the prcess thrugh negtiatin and making it cnsiderably mre cmplicated.

12 A prper apprach Why ask a central bank t design prgrams utside f its area f expertise? Demcratically-elected institutins culd certainly create a fiscal stabilizatin authrity, perhaps mdeled n the FOMC, that culd make techncratic fiscal decisins in speedy reactin t macrecnmic events. Such an authrity culd be allwed t act within assigned limits and under a clearly-specified mandate with peridic reprting. I have never heard f such a prpsal, but Cngress clearly des create specific institutins fr specific purpses.

13 Outright Mnetary Transactins

14 The recent ECB prgram The Eurpean Central Bank recently annunced an utright mnetary transactins (OMT) prgram. This prgram has been widely interpreted as a prmise t buy the svereign debt f individual natins. A key element f the prgram is that purchases, shuld they ccur, are cnditinal n the natin meeting certain fiscal targets. Purchases wuld be sterilized, s that the prgram is nt the same as U.S.- and U.K.-style quantitative easing. The prgram has been regarded as successful s far.

15 Eur area 10-year bnd spreads Surce: Financial Times and authr s calculatins. Last bservatin: week f December 28, 2012.

16 Eur area 5-year svereign CDS s spreads Surce: Blmberg and authr s calculatins. Last bservatin: January 2, 2013.

17 Fiscalizatin f mnetary plicy This is fiscalizatin f mnetary plicy: Asking the central bank t take actins far utside the remit f mnetary plicy. The analg in the U.S. wuld be a prmise t purchase, r even mnetize, state debt in exchange fr the state maintaining a fiscal prgram cnsidered prudent by the central bank. Assistance like this frm a central authrity t a regin is best brkered thrugh the plitical prcess in demcraticallyelected bdies. In Eurpe, the ECB is in essence substituting fr a weak pan- Eurpean central gvernment.

18 Ordinary mnetary plicy Ordinary mnetary plicy prvides r remves mnetary accmmdatin in respnse t macrecnmic develpments. There has been a large macrecnmic develpment in Eurpe: Eurzne recessin. Yet, little direct actin has been taken by the ECB in respnse t the recessin. The plicy rate has nt been significantly adjusted. The ECB has nt emplyed QE r used frward guidance.

19 A muted respnse One culd argue that the mnetary plicy respnse t the Eurpean recessin has been muted cmpared t mre rdinary circumstances. Why? By nearly all accunts, the mnetary plicy prcess has been bgged dwn by plitical wrangling ver the OMT and ther prgrams.

20 Ordinary mnetary plicy derailed End result: By cnducting a fiscal actin, the central bank has been pulled away frm its rdinary macrecnmic stabilizatin plicy. Standard mnetary plicy has becme wrapped up in the fiscal plicy package and subject t the negtiatins that surrund that package. This defeats ne f the riginal purpses f central bank independence: Having a mnetary authrity that can react t macrecnmic shcks quickly and effectively.

21 Cnclusins

22 Summary Financial crisis aftershcks have intrduced a creeping pliticizatin f central banking glbally. The macrecnmic perfrmance f natins with pliticized central banks has histrically been quite pr. One live example f the current trend is the ECB s OMT prgram. One interpretatin f the OMT is that it is a fiscal-type peratin, and that rdinary mnetary plicy has becme part f the negtiatin ver the fiscal package. This has altered the respnse f the ECB t the Eurpean recessin.

23 Federal Reserve Bank f St. Luis stluisfed.rg Federal Reserve Ecnmic Data (FRED) research.stluisfed.rg/fred2/ James Bullard research.stluisfed.rg/ecn/bullard/