jueves, 28 de diciembre de 2017

jueves, diciembre 28, 2017

Central banking has never looked more daunting

The line between fiscal and monetary policy is increasingly blurred

 Charles Bean


The Bank of England's Mark Carney, the ECB's Mario Draghi and the Fed's Janet Yellen. Central banks will need to continue to set policy against the background of a low natural rate for some while yet © AFP


The Bank of England’s Monetary Policy Committee has just celebrated its 20th birthday. In its first decade, growth was steady and inflation close to target. We — along with our peers — thought we had this central banking business cracked. Nemesis arrived in the shape of the global financial crisis. Rates have been rock bottom ever since and central banks’ balance sheets have ballooned. Banking regulations are being tightened. And macro-prudential policy is still a work in progress. Central banking has never looked more daunting.

The past couple of decades have witnessed a remorseless fall in the real rate of interest consistent with macroeconomic equilibrium — the “natural” rate. The causes are still a matter of debate. Some point to higher savings, others to the impact of slow productivity growth on investment. Balance-sheet repair has surely been important, too.

While central banks can set any policy rate they want in the short run, if they are to achieve their objectives over the long term it must converge to the sum of the natural rate and their target inflation rate. Criticism from politicians that central banks’ policies are penalising savers and driving up asset prices misses the point: the decline in interest rates ultimately reflects forces that central bankers are powerless to change.

Does the current state of affairs represent a new normal? Some rebound in the natural rate may be in the offing. The global demographics are at a turning point, with a substantial fall in the share of the middle aged relative to the elderly in prospect. And the former are the big savers, while the latter typically run their savings down. Moreover, a pick-up in the demand for funds to invest may materialise as new technologies such as artificial intelligence and nanotechnology come to fruition.

But any resulting rise in the natural rate seems likely to happen gradually. Central banks will need to set policy against the background of a low natural rate for some while yet. That means more episodes when policy rates are near their lower bound. Further large-scale asset purchases may be needed.

Broadly speaking, the monetary arrangements introduced in 1997 have served us well. But two aspects are worthy of note. The distinction between monetary and fiscal policy has become increasingly blurred. And the distributional consequences of monetary policy have become increasingly contentious.

Monetary policy has fiscal consequences even in normal times, but issues are starker when large quantities of government bonds or private sector assets sit on the central bank’s balance sheet. Even small changes in the yield curve have significant consequences for the public finances. Fiscal considerations become more prominent if the central bank buys risky private credits. And purchasing equities is potentially even more contentious since it involves the acquisition of control rights.

For these reasons, the fiscal authorities need to own the fiscal consequences of the central bank’s asset purchase decisions. Happily, the BoE’s Asset Purchase Facility meets that requirement, with the Treasury holding the economic interest, even though the MPC decides the amount of assets to buy. Moreover, whenever the MPC wants to increase the stock of assets there is an exchange of letters with the chancellor.

Adding distributional concerns to the MPC’s objectives would be worrying. It is one thing for the MPC to use its “constrained discretion” to limit output volatility. It is quite another to refrain from cutting interest rates or undertaking asset purchases to protect one segment of society at the expense of another. That goes to the heart of politics; such decisions should not be delegated to technocrats.

If the government of the day is unhappy about the side effects of the monetary policies necessary to maintain macroeconomic stability, then it is better for them to take mitigating fiscal action. And, if a government is really set upon the need for a different monetary policy, it should do so directly and openly by invoking the monetary policy override clause.


The writer was deputy governor of the Bank of England, 2008-14. This article is based on this year’s Wincott Memorial Lecture

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