The Future of Central Banking Study Notes

THE FUTURE OF CENTRAL BANKING

Preface

  • Editors:

    • Sylvio Kappes: Assistant Professor, Federal University of Ceará, Coordinator, Keynesian Economics Working Group, Young Scholars Initiative

    • Louis-Philippe Rochon: Full Professor, Laurentian University, Editor-in-Chief of Review of Political Economy, Founding Editor Emeritus of Review of Keynesian Economics

    • Guillaume Vallet: Associate Professor, Université Grenoble Alpes, Centre de Recherche en Economie de Grenoble (CREG), France

Copyright and Publishing Information

  • Publication Year: 2022

  • Publisher: Edward Elgar Publishing Limited, Cheltenham, UK and Northampton, MA, USA

  • ISBNs:

    • 978 1 83910 092 5 (cased)

    • 978 1 83910 093 2 (eBook)

Table of Contents

  • List of Tables

  • Editors

  • List of Contributors

  • Acknowledgements

  • Introduction: To The Future of Central Banking

  • Part I: Central Banking and Income Distribution

    • 1. Monetary Policy and Personal Income Distribution: A Survey of the Empirical Literature

    • 2. Inflation Targeting Regime and Income Distribution in Emerging Market Economies

    • 3. Monetary Policy in the United States and Its Impact on the Functional Distribution of Income: 1970–2015

  • Part II: Central Banking and Gender

    • 4. Feminist Macroeconomics and Monetary Policy

    • 5. The Necessary Winds of Change: Empowering Women in Central Banking

  • Part III: Central Banking and Ecological Concerns

    • 6. Contending Views on the Role of Central Banks in the Age of Climate Change

    • 7. Climate Change and Central Banking

    • 8. Central Banking for a Social-Ecological Transformation

  • Part IV: Central Banking, Macroprudential Policies, and Financial Stability

    • 9. Relationship Between Central Banks and Financial Regulation

    1. Macroprudential Policy of Central Banks

  • Part V: Central Banking and Structural Change

    1. Can Monetary Policy Promote Structural Change?

    1. Currency Hierarchy, Inflation Targeting, and Structural Change: The Brazilian Experience

    1. Central Banks and Democracy Under Long-Term Changes

  • Part VI: Central Banking Independence

    1. Monetary Policy Committees at BCEAO and BEAC

    1. Independence from Banks Rather Than Governments

Chapter 1: The General Ineffectiveness of Monetary Policy or the Weaponization of Inflation

  • Author: Louis-Philippe Rochon

Introduction

  • Monetary policy has traditionally downplayed fiscal policy, placing emphasis on its ability to solve economic issues.

  • The approach has often been referred to as monetary policy dominance (Rochon and Setterfield, 2012).

  • Recent crises have highlighted the limitations of relying solely on monetary policy to manage inflation targets.

  • Despite stable inflation over the past few decades, this stability may result from factors unrelated to monetary policy, including falling wage shares.

General Discontent with Monetary Policy

  • The view that monetary policy can fine-tune economic activity to achieve inflation targets is clumsy according to experts like Turner (2020).

  • Monetary policy aims at manipulating interest rates to impact inflation. Critics argue this is ineffective as empirical evidence does not support expected relationships.

  • Asymmetry of Monetary Policy: Central banks have limited power to stimulate the economy but can induce recessions through high-interest rates.

  • The crisis following 2008 showed limitations in the central banking supremacy narrative.

Deconstructing the New Consensus Model

  • The New Consensus Model suggests that

    1. Increasing interest rates leads to reduced output.

    2. Lower output decreases inflation.

    3. Changes in interest rates are administered based on a Taylor Rule that centrally aims at inflation targeting.

Key Critiques:

  1. The Arbitrariness of Inflation Targets

    • The choice of a 2% inflation target lacks strong empirical backing.

    • Different scenarios could suggest other acceptable targets, indicating the arbitrary nature of selected goals.

  2. Natural Rate of Interest

    • The ideological construction in monetary policy suggests targeting a particular natural interest rate, termed r*, which critics argue is not accurately determinable.

    • Borio (2017) claims r* is a theoretical construct that may mislead policymakers.

  3. IS Curve Concerns

    • The IS curve is crucial for establishing predicted outcomes of monetary policies. The empirical validity of its elasticity is doubted, suggesting weak links to investments and consumption shifts.

    • Both consumers and firms show insensitivity to interest rate fluctuations upon their decision-making.

  4. Issues with the Phillips Curve

    • The traditional downward-sloping Phillips curve asserts that employment and inflation have a consistent inverse relationship. Evidence shows this curve has flattened, undermining traditional monetary policy mechanisms.

    • Figures indicate minimal responsiveness of inflation to labor market changes over recent decades.

  5. Flaws in Fine-Tuning theory

    • Just as Joan Robinson (1943/1952) suggested, monetary policy's correction mechanisms reflect weakness.

    • Thus, extensive rate adjustments may lead to recessions without actual stimulation of growth.

  6. Demand-Pull vs. Cost-Push Inflation

    • Monetary policy primarily focuses on demand-side control yet fails to address cost-push inflation currently affecting many economies.

    • Interest hikes overlook crucial supply challenges, making such measures ineffective.

Conclusion and Reconstructing Monetary Policy

  • Monetary policy discussion should emphasize its role in shaping income distribution rather than strictly managing inflation.

  • Progression towards a post-Keynesian framework understanding interest rates as inherently linked to wealth distribution can better explain the implications of monetary policy. This approach views monetary actions through the lens of social equity instead of technical optimization.