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This does not mean that individual central bankers are untrustworthy. The problem is that most central banks are not as independent as many people think. In a global environment characterized by political polarization, heavy public debt burdens, geopolitical tensions, and deglobalization, the independence of central banks cannot be unlimited. As unelected technocrats, central bankers may enjoy operational independence in the short term, but ultimately governments control their appointments and oversee the budget. In many countries, the government also has the right to change the monetary policy mandates of central banks.
Economists who place blind faith in central bank inflation targeting and regard the status quo as sacrosanct fail to realize that the view that central bank independence can help curb inflation is very difficult to see. For four decades Look back. Although Finn Kydland and Edward Prescott received the 2004 Nobel Prize in Economics, monetary policy Inflation bias (inflationary bias, distortion), the solution they proposed – simply directing central banks to follow specific guidelines – was completely naive. The same can be said about hadith On inflation targeting systems Or so called About Taylor's rule.
The problem is that simple rules are inevitably tested at certain times. This happens when these rules work very poorly and need to be comprehensively revised. This happened, for example, after the global financial crisis, when central bankers' perception of what constituted restrictive interest rate policy changed dramatically. This seems to be happening now. In the current critical period, central banks have become highly vulnerable to political pressure.
The coronavirus pandemic has already brought long-dormant political and economic forces back to the fore. As recently published In the study (co-written by Hassan Afrozi, Marina Hallak, and Pierre Yared) makes it clear that these forces are unlikely to disappear anytime soon. Although the post-Covid period is characterized by increased uncertainty, making it difficult to predict macroeconomic processes, Central banks tend to risk a higher level of inflation than a severe recession in the economy.
We can say that people may not like inflation, but they like severe recessions and financial crises even less.
As geopolitical tensions increase and global growth slows, levels of economic uncertainty are likely to remain high. This is partly because central banks' “new Keynesian” forecasting models rely primarily on extrapolation. In other words, they work well under stable conditions, but they often fail to predict major turning points. At such critical moments, when central banks are particularly under political pressure, the most effective solution is usually to look for historical parallels or look at the experiences of other countries.
Of course, waves of inflation do not occur every year.
However, another wave of inflation may occur sooner than markets expect.
When central banks face economic uncertainty, they may not aim for higher inflation rates, but are likely to adjust their interest rate policy to make such an outcome more likely than a deep recession or financial crisis.
Although economists are aware of the phenomenon of inflationary bias, financial markets have not recognized it, perhaps because central bank messaging has become exceptionally effective over the past few decades. Central bankers realize that once markets question their intentions, interest rates will quickly reflect higher inflation expectations. However, this is unlikely to help them resist pressure from politicians, who are often focused only on the upcoming elections and may prioritize other issues at the expense of short-term inflation stability.
Although governments can take a number of steps to strengthen the independence of central banks, such measures are unlikely in the current populist environment. Instead of focusing on keeping inflation within target, central banks are under increasing pressure to focus on issues such as inequality, climate change and social justice that they lack the tools, expertise or political legitimacy to address.
To be sure, central bankers will strive to meet inflation targets, but they must always be wary of political leaders. To maintain their independence under increasing pressures, central banks must be flexible and sometimes flexible Discounts They must do so, which could lead to a repeat of the post-Covid inflationary wave in the next ten years. Therefore, realistic investors should understand that even if central banks can rein in high inflation now, it will almost certainly return sooner than most forecasts currently expect.
Copyright: Project Syndicate, 2024.
Kenneth Rogoff
He is a professor of economics at Harvard University. Between 2001 and 2003, he served as chief economist and research director at the International Monetary Fund. His research areas include issues of debt and financial crises, central bank independence, and exchange rate policy. In 1978, he was awarded the title of international chess master.
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