In their paper Against amnesia: re-imagining central banking, Benjamin Braun and Leah Downey describe the elite consensus on central banking as a ‘holy trinity’. This holy trinity consists of (1) an independent central bank that (2) sets the short term interest rate to (3) achieve stable prices1.
The fact that quantitative easing (QE) is still often called unconventional monetary policy speaks volumes for how deeply the holy trinity is ingrained in the minds of the community. However, more and more people are questioning this model of central banking2.
While almost nobody wants to ditch price stability, central bankers are taking on extra responsabilities based on local sensitivities. European central bankers (both at the ECB and the Bank of England) are making their institutions climate friendly. The Federal Reserve has had a dual mandate of price stability and full employment for a long time. The Reserve Bank of New Zealand will take house prices into account.
Although central banking post-holy trinity will have its own challenges, I, for one, welcome our central bank overlords.
- The BIS (via FT Alphaville) has an overview of inflation targeters and FX targeters
- Somebody should write a book about how and why views have shifted. The disappointing recovery after the Global Financial Crisis and the work of activists like Positive Money and the Modern Monetary Theory movement definitely deserve part of the credit.
- Politicians have always appointed central bankers, so they never were truly independent.