Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 19 November 2015

When central bankers should keep quiet

I suspect the standard view among economists about what monetary policy makers should and should not say in public is set out clearly in this talk by Willem Buiter. (The paper is worth reading for other reasons as well. I wish I had called an earlier discussion of mine on German macro myths the ‘Triad of Teutonic Fallacies’.) He gives what I think is the standard view among economists. Put simply, it says that monetary policy makers should stick to talking about monetary policy: ‘sticking to their knitting’ to use an Alan Blinder phrase. They should talk about other things only in terms of how it influences their ability to fulfill their remit.

Why should they be so coy? Because they have been given a privileged position to take decisions that would otherwise be taken by a democratically elected government, and they should not use that platform to get additional publicity for their views on issues beyond their remit. A strong exponent of this view is Tony Yates, whose latest complaint about Mark Carney straying beyond his remit related to his public position on the benefits of UK membership of the EU.

I also used to take this position, and my instinctive reaction was similar to Tony’s. But I now think the situation is much more nuanced. Of course there should be restraints on what central bankers should say in public: if one of them told you which political party would be ‘best for the country’ that would be way out of line. However I think it is possible to construct a number of defences for monetary policy makers when they do stray beyond their knitting.

1.  It influences the outlook for monetary policy defence

This may seem obvious, but I think it goes further than some people think. For example Willem goes too far in criticising Bernanke’s support for fiscal stimulus in 2009. It is a great pity that more central bankers did not say in 2009 and later that hitting the zero bound for interest rates seriously compromised their ability to do their job, and that fiscal stimulus would have been effective in increasing output. Saying that this was political, and therefore out of bounds for monetary policy makers, is a bad argument. Anything can be labelled political. Some people think global warming is political. But is also a fact, and therefore central bankers are quite right to treat it as a fact when discussing its implications for financial sector stability, for example.

2. I know about this stuff defence

In an earlier post I defended Andy Haldane talking about corporate governance because it would be socially harmful not to hear his views on these issues, given his considerable talents and expertise. It would be a great shame if becoming a member of a monetary policy committee meant that you had to keep quiet about other issues where you had - prior to that appointment - considerable expertise. Of course MPC members could abuse this by talking about issues on which they have no expertise or insights, but that surely suggests we should judge each of these cases on their merits.

3. Improving the influence of economic expertise in the public debate

Neither of the two defences so far would cover Mark Carney making statements about the past benefits of EU membership. The first defence would cover a discussion of how Brexit might influence the ability of the MPC to do their job, or how UK exit might impact on activity and inflation, but those are different issues. Nor am I aware that Carney has some personal expertise in assessing the benefits of membership, which would be the second defence.

However even Tony acknowledges that the report Carney was speaking to is very good. It contains a summary of existing analysis of the economic benefits of membership. If analysis of this kind was widely discussed or acknowledged in the media as part of the Brexit debate, then we might legitimately question what the Bank is doing spending public money repeating them. In reality we have exaggerated claims from either side, with little use made of more reputable academic analysis. In short, the Bank is helping raise the quality of the political debate. The fact that its conclusions are uncomfortable reading for one side is irrelevant.

It is true that the Bank was not established to do this kind of thing. If there was some institution set up by UK universities that routinely pooled economic knowledge in this way, then they would be the people to write a report of this kind. Perhaps such an institution should exist, but it does not. Note that this defence relies crucially on the analysis being fair and comprehensive.

4. Transparency

The example that clearly exercised Willem the most, and which I initially focused on, was the behaviour of the ECB. But the real scandal at the ECB is what was done behind the scenes (some of which Willem discusses), rather than what was said in public. Are we not better off knowing what they were saying in private because they also said it in public? There are clearly costs and benefits here.

This raises a further thought, which as far as I know is never discussed. Should central banks ever give private advice to governments about matters that are not financially sensitive? For example, it was said that in the UK in 2010 the coalition partners were given briefing from the Bank, which may have helped persuade the minority party in that coalition to back austerity. Why should that advice have remained secret?

I have in mind here the position that I believe is adopted by the OBR, the UK’s fiscal council. All its work is made public. The government does not commission the OBR to produce reports for its eyes only. The OBR adopts this position because it is concerned to establish its independence from government. Some questions were recently raised about the government trying to influence what the OBR writes. An obvious way to avoid such concerns is for the OBR to make public all such ‘advice’ from government.

If we look around the world today, the main issue is not what central bankers say in public, but the influence they have on politicians behind closed doors.


  1. I think Vince Cable and David Laws went odd when Greece hit Feb 2010, and Clegg followed them. No one in the central banks told Danny Alexander to go on about 'maxing out the nation's credit card' with the same words as Farage.

    It would also have been nice, assuming he held the same position when a member of MPC, that Andrew Sentance thought:

    'If 2 per cent has been a pragmatic norm, why not take advantage of economic circumstances that allow it to drop lower – to zero? Deflation has been the “dog which has not barked” since the financial crisis. And mild deflation – when it has occurred – does not appear to have damaged economic growth...And the fact that a target of zero inflation may not allow central banks to easily impose negative real interest rates may actually be a good thing – protecting savers, who have suffered heavily as a result of very low interest rates since the financial crisis" (27 March 2015).

  2. Quite topical as we've just had the Chief of the Defence Staff giving a high-profile TV interview in full dress uniform, giving a dire warning about voting for the opposition as currently constituted. (But then he did take his medals off, and the Conservative Party's never been shy about allying itself with politician/generals.)

    To translate these informal defences into actual principles of public governance would require more determinacy and precision, though., and I'm not sure they all survive the process.

    I'd suggest 1. sounds fine and is really only saying that the GBoE ought to be allowed to issue reservations - or maybe, were procedures to be formalised, 'write a letter to the chancellor' - about policies that threaten to impinge on his ability to do his job. That is, appropriately restrained comment on this kind of topic does lie within the scope of the G's professional concerns.

    2. Doesn't seem adequate; the G may know about certain things but so do plenty of other people. No doubt writing academic articles or something is OK - but using official position as a soapbox isn't. Seperately, the issue of expertise seems highly contestable, and not something it would be acceptable to formally assess.

    3. Much the same, if not more so. Again if the G were in a personal capacity to help improve public understanding, perhaps by joining or helping to organise a body such as you mention, that might be fine - it's issuing statements in his/her capacity as GBoE (or in an ambiguous capacity) that is at issue here really.

    4. Again the issue of what kind of statement, claiming what imprimatur, in what medium and subject to what procedures seems important. No doubt internal communications should be made much more transparent, but one participant issuing official or quasioffical press briefings containing possibly slanted or cherrypicked versions of what was said doesn't seem the way to do it.

    On that last point, in case anyone is interested, the current govt consultation into FoI asks for opinions about this kind of transparency. I think it may just be open for another day or so.

  3. We could make life much simpler by doing away with monetary policy altogether. Politicians have invented far too many Quangos, to absorb blame when amateur politicians screw up the economy. The central bank is just another Quango, no different to all the rest, except, it can do far more damage.

    The natural rate of interest in a fiat currency economy is ZERO. There are much easier ways of controlling commercial bank credit creation (horizontal money), as required, when high risk lending arises into an inflation sensitive sector of the economy. (2008 sub-prime mortgage securitisation scam, for instance.)

    The Treasury has control of (vertical money) creation by virtue of it being the CURRENCY ISSUER, (spender of first resort) into the private sector economy; AND, the CURRENCY REMOVER (monopoly taxer) from the private sector economy. The difference between the two, at any moment, is the private sector's SAVINGS, also mistakenly called the "national debt".

    This fiat money system is a lot simpler than the 1% elite would have you believe.

  4. "is the private sector's SAVINGS, also mistakenly called the "national debt"."
    Misleading acorn. It is one source of private sector savings. It represents the NET savings over investment. You fail to mention bank lending.

    "Because they have been given a privileged position to take decisions that would otherwise be taken by a democratically elected government, "

    IMV big problem with the central banks is the NAIRU belief.

    Talking about shuffling interest rates when you have 5% of your productive capacity sat idle *as a matter of design* is the stupidest idea ever created.

    The job of spending money and setting taxes is with the elected state.

    There is a paper here you may find interesting Simon (or not):

    But the main problem isn't the central banks. I have looked at the alternative Labour are offering and it requires the same amount of the population unemployed as the Tories, is based on the same lies, will run into a massive supply side issue (just like they already have in Japan) in a 80% service based economy and therefore won't do what they think it will do.

    It's massively unimpressive because it plays away from home in Tory land.

    Eventually people will realise that for every £100 a government spends you get about £90 back in taxation whatever the tax rates, and about £10 increase in people's savings/reduction in their debt. Limits are real resources, not money.

    When we get to that point we can start having sensible conversations. At the moment both Labour and Tories are arguing about how to hold the tide back.

    Time to change the frame and explain to people how money works.

  5. The government gets all its spending back eventually at the end of time, at that point there would be no savings of "financial" assets, as opposed to "real" assets; in the private sector. Only the currency issuer can increase the "net financial assets" in the economy. In the UK that is the Treasury (not the Bank of England).

    Commercial Bank lending does not increase the net "financial" assets in the private sector. For every deposit created by the bank into a customer account, a liability for the bank, a loan agreement balances it out as an asset for the bank. All commercial bank "lending" (credit creation) sums to zero all the time.

  6. Re 2 and I know about this stuff - I think in theory this nice, but in reality, as most public I. E. Non - academic debates about important political-economic issues makes clear, knowing yer stuff is less important than having what are considered the appropriate albeit generic credentials to comment (which a Bank of England aasociation confers). And even better when the commentator's views slot in to and/or reinforce a recognised media and/or political agenda or trope. Hence , Nial Ferguson, Andrew Sentence et all who continue to get mainstream media attention despite the frequently interesting nature of their analysis and conclusions.


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