Second, there is a risk that political and popular support for central bank independence will fade along with memories of the damage that high inflation inflicted in the past. The more that stable prices are taken for granted, the less that monetary policy makers can expect to be insulated from political attacks when they venture into politically sensitive debates.
Take the backlash that Mark Carney, governor of the Bank of England, faced when he issued prereferendum warnings about the potentially damaging economic consequences of Britain leaving the European Union. Or the acerbic criticism that Gordon Brown, a former British prime minister and finance minister, directed at former United Kingdom central bank officials at last week’s conference for their commenting on fiscal policy. The attack was all the more pointed for being delivered by the architect of the Bank of England’s modern independence.
Clashes between politicians and central bankers may become the norm, Charles Goodhart, a professor at the London School of Economics and a former rate setter, told the attendees. Politicians championed central bank independence and inflation targeting during decades when both inflation and government debt as a proportion of gross domestic product were falling. They could well become less supportive in a low-inflation, high-debt era. Though the risk of prices galloping higher appears remote, the impact of higher policy rates on governments’ borrowing costs would be all too real.
The breakdown in old economic relationships makes central banks even more vulnerable. Contrary to textbook economic theory, unemployment has been falling without inflation flaring up. Monetary policy makers and other economics experts are hard pressed to explain why. The longer the phenomenon persists, the more doubts will be cast on the necessity and wisdom of continuing to target inflation, either of 2 percent or at all.
These questions are all the more likely to surface in an era when inflation is no longer viewed as the main threat to growth or equality. Rate-setters are the first to admit that monetary policy cannot tackle some of the causes of sluggish economic and wage growth, such as low productivity. Faced with restive voters, politicians will inevitably wonder whether fixing these issues wouldn’t be easier if they took back control of policy rates, or gave central banks a different mandate altogether.
Another big financial crisis would make demands for an overhaul even harder to resist. The last crisis that started a decade ago forced monetary policy makers to stop focusing too narrowly on just fighting inflation. Some, such as the Bank of England, were officially tasked with supervising banks. Others, including the United States Federal Reserve, expanded the scope of issues they weighed when setting policy, taking into account the potential for bubbles developing in financial markets and asset prices.
But financial stability is, as Mr. Carney termed it last week, “an orphan child.” There’s little certainty about who is ultimately responsible for maintaining stability, and it’s even harder to judge whether policy makers are doing enough to preserve it. Unlike inflation, there are no simple and permanent benchmarks against which progress toward financial stability can be measured. Its absence is more evident. When things inevitably go wrong, central bankers will take their share of the blame. That, too, could stoke demands for a broader review of central bankers’ task — and their autonomy.
The tenor of the Bank of England’s conference showed policy makers are well aware of such dangers. What they might do to mitigate the risks is less clear. It would help if they could ferret out what is driving inflation and discover whether economies have undergone a structural change that warrants a new approach to policy. Conducting regular reviews of their mandates, say every decade or so, might also make a difference. When superheroes begin to lose their powers, it makes sense to ask for help.
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