The theme of this year’s meeting of the world’s central bankers in Jackson Hole, Wyoming, was “Fostering a Dynamic Global Economy”. It had very little to do with monetary policy since another topic chosen by the European Central Bank was “Investment and Growth in Advanced Countries”. While there is nothing wrong with central bankers discussing broader macroeconomic areas such as growth, trade and investment, central bankers are made independent precisely because they are in charge of achieving their own objective – that is maintaining price stability – regardless of the economy’s underlying growth rate. So why do central bankers discuss an area that goes beyond their responsibilities?
The current conditions are favorable for monetary policy-making, particularly for the ECB as since the creation of the Economic and Monetary Union (EMU) in 1999, the ECB has only been responsible for determining its monetary policy. The ECB’s job was hard from the beginning – the single currency was born into the Asian crisis of 1997 and the Russian default of 1998. Given this context, the Eurozone is actually doing much better today than it was in 1999.
Labor force participation is 5 points higher than it was back then and fewer workers seem to be discouraged from job-seeking than at the start of EMU. At this background it is difficult to explain why the ECB continues to insist that unconventional monetary policies are needed. However, when it comes to long-term inflation prospect, it is debatable whether the long-term inflation expectations justify the need for massive quantitative easing and a policy rate 250 points lower than it was at a time of weaker market fundamentals. This congruity is, however, present also in the United States, where one finds a similar combination of inflation and unemployment both today and two decades ago.
In Japan, inflation is now higher than it was during the Asian financial crisis and unemployment is at its lowest in half a century. Yet, Japan, just like the EU and the US, continues a tendency to tilt at deflation windmills with massive government debt and rock-bottom interest rates. Central bankers surely wish for a dynamic global economy but that is something over which they have little influence. Rather than discussing issues that are core to their areas of responsibility, they ought to focus more on explaining why they have shifted their goalposts so much and whether it is time to move them back.
‘Why are Central Bankers Shifting the Goalposts?’ – Commentary by Daniel Gros – Centre for European Policy Studies.
(The Commentary can be downloaded here)