CAMBRIDGE – Listening to central bankers, one would think that the recent bout of high inflation was merely an excusable post-pandemic forecasting error made under extreme uncertainty. But while this narrative now prevails in markets and the financial press, it presumes a level of central-bank independence that is simply unrealistic in today’s volatile economic and political environment. And even if central banks manage to get inflation back down to 2% in the foreseeable future, the likelihood of another inflationary surge within the next 5-7 years has significantly increased.

This is not to say that individual central bankers are untrustworthy. The problem is that most central banks are not as independent as many believe. In a global environment marked by political polarization, onerous government debt burdens, geopolitical tensions, and deglobalization, central-bank autonomy cannot be absolute. As unelected technocrats, central bankers may have short-term operational independence, but governments ultimately control appointments and oversee budgets. In many countries, the government also has the power to reset monetary mandates.

Economists who drink central banks’ inflation-targeting Kool-Aid and view existing arrangements as sacrosanct fail to recognize that the belief that central-bank independence can help control inflation is barely four decades old. While Finn Kydland and Edward Prescott rightly received the Nobel Prize in Economics in 2004 for developing a theory of inflationary bias in monetary policy, their proposed solution – simply instructing central banks to follow specific guidelines – was rather naïve. The same could be said of modern inflation-targeting regimes or the so-called Taylor rule.

QOSHE - Central Banks’ New-Old Inflationary Bias - Kenneth Rogoff
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Central Banks’ New-Old Inflationary Bias

59 10
27.05.2024

CAMBRIDGE – Listening to central bankers, one would think that the recent bout of high inflation was merely an excusable post-pandemic forecasting error made under extreme uncertainty. But while this narrative now prevails in markets and the financial press, it presumes a level of central-bank independence that is simply unrealistic in today’s volatile economic and political environment. And even if central banks manage to get inflation back........

© Project Syndicate


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