Should politicians hand over responsibility for economic growth to central bankers?
There has been plenty of talk in recent weeks about a revolution in central banking. Last month, Mark Carney, who later this year will become governor of the Bank of England, spoke about central banks scrapping inflation targets and instead aiming to achieve a certain level of nominal growth in gross domestic product. A day later, chairman Ben Bernanke said the US Federal Reserve would keep interest rates close to zero until unemployment fell below 6.5%. And, as if that were not enough, Japan’s new prime minister, Shinzo Abe, tacitly threatened the independence of the country’s central bank unless it agreed to more stimulus measures.
Despite the stir they caused, the latter two events were not particularly radical. The Fed’s mandate states that it must promote (in this order) “maximum employment, stable prices and moderate long-term interest rates”, while Mr Abe has merely called for the Bank of Japan to increase its inflation target from 1%.
Mr Carney’s suggestion was drastic, however, and challenged the very concept of central banking. Any central bank targeting a specific level of economic growth is almost certainly encroaching on fiscal policy, something that has until now been firmly under the remit of politicians, not unelected central bankers.
Yet, rather than dismissing this approach out of hand, UK chancellor George Osborne, who picked Mr Carney to head the Bank of England, said he was open to it.
Such thinking reflects the increasingly fashionable idea that central banks are the main actors when it comes to dragging Europe and other parts of the developed world out of their economic slumps. Many commentators have urged central banks to rise to the 'growth challenge'.
This would be a dangerous path to tread. Central banks traditionally have been tasked with controlling a few things – chiefly inflation and, in some places, exchange rates – because they have the tools to do this at their disposal. But they do not have the ability to spur growth by, for example, reforming labour markets or pushing through legislation to make businesses more productive and innovative.
In the eurozone, Mario Draghi can buy struggling countries time to reform their economies, as he did with his long-term refinancing operations. This bolstered banks’ liquidity and brought down sovereign bond yields in the peripheral countries. But he can hardly be expected to reduce unemployment in Spain or make Italy’s companies more competitive. That is the job of elected politicians in those countries, not the European Central Bank.
It may be feasible to ask central banks to adopt looser monetary policy. But making them directly responsible for growth rates is another thing entirely.
