Finanz und Wirtschaft, July 25, 2020. PDF.
The Swiss National Bank—yes, the Swiss one—feels it must remind politicians of its independence. Parliamentarians from left to right (!) voice demands. To shrink the SNB’s balance sheet? No, for more central bank profits to be distributed sooner rather than later.
I discuss misconceptions, possible motivations, and a constructive response. «The best way to defend the independence of a central bank is never to exercise it.»
The Economist reported about the history of central banks and their independence. One snippet:
Typically, Richard Nixon took the bullying furthest, leaking a false story that Arthur Burns, Martin’s successor, was demanding a 50% pay rise. Attacked by the press, Burns retreated from his desire to raise interest rates.
The Economist reports that implementation gradually changes:
[T]he way in which the People’s Bank of China conducts monetary policy is changing. It is beginning to look a little more like central banks in developed economies as it shifts towards liberalised interest rates. Rather than simply ordering banks to set specific lending or deposit rates—the focus for many years in China—it is altering the monetary environment around them. China does not yet have an equivalent of the federal-funds rate in America or the refinancing rate in Europe, but it has a few candidates for its new benchmark interest rate. The seven-day bond-repurchase rate, which influences banks’ funding costs, is in pole position.
There is also an element of political intrigue in this transition to a more mature monetary framework. The Chinese central bank sits under the State Council, or cabinet, which has the final say over lending and deposit rates as well as other big policy decisions. Repo rates, by contrast, are seen as sufficiently abstruse for the central bank to decide on its own when it wants to change them.
The Economist speculates that central bank independence might be on its way out. The article suggests that motives for independence (i.e., Sargent/Wallace or Barro/Gordon type arguments) might be less relevant given the environment of low inflation and interest rates.
See also my earlier, related blog post.
In the Richmond Fed’s Econ Focus, Eric Leeper explains his views.
My view is that central banks have put far too many resources into understanding tiny fluctuations and too few resources into the things that actually matter. …
Something like the basic Taylor rule doesn’t really serve as a useful litmus test for what policy is doing in the face of these DCDs, so it’s a little bizarre to me that a lot of central banks routinely calculate what the path of the interest rate would be with a simple Taylor rule as if that’s a useful benchmark. It’s not obvious to me what that’s a benchmark for.
Now, how all of [current policy] ties into the active/passive framework is really an open question. A lot of it depends on what you think is going to happen to the Fed’s balance sheet.
… the recovery from the Great Depression in 1933 when Roosevelt took the United States off the gold standard. Going off the gold standard converted government debt from effectively real debt to nominal debt because the price level under the gold standard was beyond the control of the government. At the same time, the fiscal actions Roosevelt undertook were what nowadays we would call an unbacked fiscal expansion. … This is like a fiscal rule that says the government will run deficits until the price level recovers to some pre-depression level. And the Fed was just keeping the interest rate flat. So it looked a lot like passive monetary/ active fiscal.
The thing is, there’s not a lot of theoretical justification for creating these walls. What we’re finding more and more is that there’s always some role in optimal policy for using surprise inflation to revalue debt and bond prices, so long as there is some maturity to government debt. … maybe it is a slippery slope once you’re in the political realm. But from an academic perspective, if your objective is to arrive at a rule that would be mechanically followed by a central bank, then there’s no harm in having fiscal variables enter that rule.
Neue Zürcher Zeitung, May 12, 2014. PDF. Extended version in Ökonomenstimme, May 13, 2014. HTML.
Slides for presentation at Lilienberg Unternehmerforum conference on “Geldpolitik 2020—Grundlagen und Szenarien (Scenarios for Monetary Policy 2020),” October 4, 2013. PDF.