Must-Read: Refet S. Gürkaynak and Troy Davig: Central Bankers as Policymakers of Last Resort

Must-Read: So should central bankers be given more tools–conduct monetary/fiscal policy via “social credit” assignment of seigniorage to individuals and monopolize financial regulation? Or should central bankers focus on price stability and only price stability? I would say central bankers should be (a) more modest, but also (b) commit not to price stability but to making Say’s Law true in practice…

Refet S. Gürkaynak and Troy Davig: Central Bankers as Policymakers of Last Resort: “Central banks around the world have been shouldering ever-increasing policy burdens beyond their core mandate…

…of stabilising prices… without an accompanying expansion of their policy tools. They have become policymakers of last resort, residual claimants of macroeconomic policy. As central banks take on the duty of addressing policy concerns other than inflation–and consequently take the blame for not completely solving those problems–other policymakers get a free hand in pursuing alternative goals, which may not be aligned with social welfare. The end result is that tools available to the central bank may be used excessively but ineffectively….

As Orphanides (2013) highlights, the increase in central banks’ implicit mandates is widely visible. In the developed economies, this is most clearly manifested in central banks’ attempts to compensate for fiscal tightening after the Great Recession. More recently, attention has turned to using interest rate policy to promote financial stability. In developing and emerging market economies, central banks carry out policies to affect a long list of macroeconomic outcomes, including capital flows, exchange rates, bank loan growth rates, housing prices and the like, as well as keeping an eye on inflation. An implicit expectation that central banks will take on these objectives, along with their willingness to do so, runs the risk of producing inferior outcomes compared to when central banks mind their core business of fostering price stability…

November 27, 2015


Brad DeLong
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