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Monday, 27 July 2015

Should central bankers stick to talking about monetary policy?

Few disagree that the recent remarks on corporate governance and investment made by Andy Haldane (Chief Economist at the Bank of England) are interesting, and that if they start a debate on short-termism that would be a good thing. As Will Hutton notes, Hillary Clinton has been saying similar things in the US. The problem Tony Yates has (and which Duncan Weldon, the interviewer, alluded to in his follow-up question) is that this is not obviously part of the monetary policy remit.

Haldane gave an answer to that, which Tony correctly points out is somewhat strained. Perhaps I could illustrate the same issue by going down a better route that Haldane could have used. He could say that the causes of low UK productivity growth are clearly under his remit, and one factor in this that few dispute is low investment. If he was then asked by an interviewer what might be the fundamental cause of this low investment, Tony would argue that his reply should be that he couldn’t really comment, because some of those reasons might be too political.

I have in the past said very similar things to Tony when talking about the ECB, and their frequent advice to policymakers on fiscal rectitude and structural reforms. My main complaint is that the advice is wrong, and I puzzle over “how the ECB can continue to encourage governments to take fiscal or other actions that their own models tell them will reduce output and inflation at a time when the ECB is failing so miserably to control both.” But I have also said that in situations where fiscal actions have no impact on the ability of monetary policy to do its job (which is not the case at the moment), comments on fiscal policy are “crossing a line which it is very dangerous to cross”.

However I am beginning to have second thoughts about my own and Tony’s views on this. First, it all seems a bit British in tone. Tony worked at the Bank, and I have been involved with both the Bank and Treasury on and off, so we are both steeped in a British culture of secrecy. I do not think either of us are suggesting that senior Bank officials should never give advice to politicians, so what are the virtues of keeping this private? In trying to analyse how policy was made in 2010, it is useful to have a pretty good idea of what advice the Bank’s governor gave politicians because of what he said in public, rather than having to guess. (Of course private advice to politicians is never truly private, but this hardly helps, because with secrecy it allows politicians to hint that advice of a particular kind was given when it might not have been.)

The issues of MPC external member selection that Tony worries about are real enough, but perhaps that illustrates problems with the selection process. My guess is that the Treasury would be inhibited about choosing an MPC member who had previously been strongly critical of the government on other issues anyway. As I said my main complaint about the ECB is the nature and context of the advice they give, and at least by making it public we know about this problem.

It is often said that central bankers need to keep quiet about policy matters that are not within their remit as part of an implicit quid pro quo with politicians, so that politicians will refrain from making public their views about monetary policy. Putting aside the fact that the ECB never got this memo, I wonder whether this is just a fiction so that politicians can inhibit central bankers from saying things politicians might find awkward (like fiscal austerity is making our life difficult). In a country like the UK with a well established independent central bank, it is not that clear what the central bank is getting out of this quid pro quo. And if it stops someone with the wide ranging vision of Haldane from raising issues just because they could be deemed political, you have to wonder whether this mutual public inhibition serves the social good.



8 comments:

  1. I heard a BBC Radio 5 presenter say today that 'no one could have seen interest rates being where they are today fives years ago.'

    The sooner the cultural dregs of BoE old school tie clubland is kicked the better.

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  2. Why do you think that the causes of low UK productivity growth are under the BoE's remit?

    If that productivity growth reflects e.g. labour hoarding, I understand (it matters for the output gap and therefore monetary policy) but it seems that Haldane's point is about the trend of productivity growth, not any cyclical component.

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  3. Suppose it became clear that the Governor of the BoE supported (the policies of) one political party and was against (the policies of) another political party. That would increase the suspicion that the BoE was not targeting inflation (or whatever) and was instead creating booms and busts to try to help or hinder those parties' election chances.

    It raised eyebrows when a recent governor of the BoC, while still in office, was actively courted to become the next leader of the Liberal Party.

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  4. In the US you have two powerful unelected institutions, the Fed and the Supreme Court. The latter has far more power over every day life, even choosing a president.

    If Bernake or Yellen talk about fiscal policy it's just words, they can't pass an infrastructure bill. And at the zlb they should describe the limits about monetary policy and the role of fiscal stimulus. They are economists and they have an employment mandate .

    Each fed regional bank has a website and most post various articles on the economy, increasing transparency . When you have a political system is abjectly failing like the US Congress it can't hurt for central bankers to raise their eyebrows. The right wing crazies will behave the same regardless.

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  5. «fiction so that politicians can inhibit central bankers from saying things politicians might find awkward (like fiscal austerity is making our life difficult). In a country like the UK with a well established independent central bank, it is not that clear what the central bank is getting out of this quid pro quo. And if it stops someone with the wide ranging vision of Haldane from raising issues just because they could be deemed political»

    The fiction is that the central bank is truly independent. It is just on a loose leash. It is independent as long as it follows the establishment "bipartisan" consensus, which for all parties in the UK is now to push down wages and push up asset prices, redistributing from workers to rentiers.

    The "independent" central bank cannot be the opposition, especially against the "establishment" bipartisan consensus, especially when it reflects a large part of public opinion. Or else.

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  6. I see this partly as a result of the a narrow view on organisation/institutional theory in the BoE (and by monetary economists?).

    In the 1980s, inflation-targeting literature suggested that a focused central bank with a single remit was best for inflation-targeting. Mervyn King in the 1990s jealously guarded the scope and role of the Bank, encouraging BoE staff to focus narrowly on the remit (e.g. cutting FS staff).

    But that view was based on too narrow a view of what public institutions are for; economists are not political scientists. Public institutions are given functions in legislation which can't always predict the future objectives/crisis which might be faced.

    When it came to the financial crisis, the BoE took a "not my problem" approach (a la Yes Prime Minister - "well, I'm afraid that's YP... Your problem" https://www.tumblr.com/search/sivil%20servants). FS was within the remit of the FSA, even if the Bank had tools to address this.

    In this case, the improvisation by the Fed was the "right" thing for policy, even if the legislation hadn't necessarily envisaged it.

    I think the narrow view of what a public institution "should do" is still heavily influenced by the monetary policy debate - written by economists, not political scientists!

    What do you think?

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  7. "If Bernake or Yellen talk about fiscal policy it's just words, they can't pass an infrastructure bill. And at the zlb they should describe the limits about monetary policy and the role of fiscal stimulus. They are economists and they have an employment mandate."

    FWIW, in every one of his mandated Congressional testimonies post-Lehman, Ben Bernanke very politely requested Congress do more fiscal stimulus, and indeed described the limits of monetary policy as the reasoning behind the request.

    It had no effect, of course, but at least Bernanke was fighting the good fight, and doing exactly what you say he should have done.

    (On the other side, the execrable Alan Greenspan testified in 2001 in favor of the Bush tax cuts for the rich. And not surprisingly, that did have an effect. So while I agree that the Fed chair has a responsibility to chime in on fiscal policy, the effect all depends on whether the particular Fed chair is good or evil...)

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  8. This is also of course an old argument for Haldane which he first made in his old, financial stability job, where the relevance is clearer: http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/speech495.pdf

    Incidentally, note the new job of that paper's co-author: http://blogs.spectator.co.uk/coffeehouse/2015/07/george-osborne-hires-economist-journalist-to-replace-rupert-harrison/

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