OVER the weekend, there were rumors that Mark Carney, the Canadian front-runner at the helm of the Bank of England, could leave his post in 2018. He would stay on.) An early exit for Mr. Carney would be wise , which has been in the job since 2013. While Canada is the world’s great liberal icon, Britain is a mess. Not only will Mr Carney have to steer the British economy through rough economic seas after the referendum, but he has also faced criticism from Tory leaders, who are angry at Mr Carney for trying to to warn Britons that Brexit would indeed be an economic disaster.
This morning, the Financial Timesreports that the rumors are false, and Mr. Carney is set to serve a full term. One could practically hear the sigh of relief around the City. However, is it right that so much seems to be riding on the presence or absence of one person?
Back in 2012, when it was first announced, I said no:
I worry, however, that this post tells us something discouraging about monetary policy. In particular, I worry that it means that economics has done such a poor job of explaining the roots of persistent economic failure that politicians feel unable to accept institutional reforms, or new orders, in response. on economic weakness. If governments cannot feel secure in knowing what went wrong and how to fix it, their best bet is to find people who have presided over reasonably successful economies and paying a premium for their skills, whatever it is.
That might be right. But maybe that’s not all there is to it. Notional independence is not achieved by central banks because the maestros who run them are secret geniuses who need the freedom to work their magic. They gain notional independence because it is believed that politicians cannot be trusted to implement a central banking tech industry – the incentives they face are wrong, and different from those of central banker meeting.
The technical business of central banking is supposed to be simple: central bankers have specific mandates and specific targets and a set of tools that can be used to keep the economy on track. There is a lot of uncertainty, but the job should not require knowledge or skills that are not publicly available. If Mr Carney knows how monetary policy works that others don’t, it doesn’t make sense for him to keep it a secret so he can negotiate for a slightly higher Bank of England salary. He should either publish that knowledge and bask in the professional glory or quit hedge funds to make real money.
So it’s possible, as I wrote in 2012, that governments are so concerned about hiring stars as central bankers because they don’t really understand how monetary policy or the economy works and it seems wise to put people with a successful history in charge. But it is also possible that star central bankers will be really important, because central banking is not at all technocratic in nature but is very political.
Is it very political? Well, yes, of course it is. After all, central bank independence is not established by inalienable divine law; what elected governments take away too. Central bank policy is therefore constrained by the need to protect long-term institutional independence. Central bankers also want to expand their institutional influence, but it remains politically informed when, for example, it is politically expedient to emphasize public debate about fiscal policy and when to be quiet In general, central banking is largely a PR exercise. To do their job well, those in the top jobs must be able to manage public expectations: about the future path of inflation in some cases, about the solvency of the banking system in others. The reason for wanting someone like Mark Carney to head a central bank, or Raghuram Rajan, or Stanley Fischer, is because they have secret economic knowledge, but because they are skilled politicians, able to influence put forward while protecting the “independence” of the central bank.
If that’s really what’s going on, though, maybe the very idea of independence isn’t tired after all. Independence, after all, is primarily about shaping incentives, and incentives to protect institutional independence can lead to perverse behavior. If the need to protect independence prevents a central bank from adopting a completely different policy (such as changing from an inflation rate target to a nominal GDP growth rate target, for example) and the economy suffers through years or decades of demand. -side stagnation as a result, that is bad.
The unfortunate news is that it is undesirable to hand monetary policy back to elected leaders at the moment, given how well the politicians in rich economies have been doing over the years. finally. Which is somewhat ironic. If central bankers had been more aggressive in their efforts to stimulate demand and reduce unemployment over the past decade, the politics of the rich world might not have taken such an ugly turn.
