SYDNEY and KUALA LUMPUR, October 25 (IPS) – Widespread negative reactions to the UK government’s recent ‘small budget’ have forced the resignation of new Prime Minister Liz Truss. This volume has highlighted issues of macroeconomic policy coordination and related interests.
Macro-policy coordination
But macroeconomics, specifically the fiscal-monetary policy coordination has almost become “taboo“As central bank independence (CBI) becomes the new mainstream. It was accused allow CB to finance government deficits. Critics argue that inflation, even hyperinflation, has become inevitable.
Fiscal policy – especially changes in taxes and government spending – is primarily intended to influence growth and distribution in the long run. The CB’s monetary policy – for example, changes in short-term interest rates and credit growth – claims to prioritize price and exchange rate stability.
In the early 1990s,Washington Consensus‘implies that the two macro-policy actors should work independently because their different times. After all, governments must follow short-term political considerations, not least with respect to the monetary stability necessary for long-term growth.
Self-proclaimed “technocrats”, CBs increasingly set their own goals or objectives. CBI participated in both ‘target’ and ‘tool’ independent, instead of ‘target dependent’ with ‘tool independent’.
CBI is ostensibly to avoid ‘financial domination‘ of monetary policy. Meanwhile, the government’s fiscal policy becomes dependent on the CB inflation target. For former Reserve Bank of Australia Deputy Governor Guy Debelle, monetary policy has become “The only game in town for demand management“.
Debelle noted that with the exception of the brief and rare coordinated fiscal stimulus in early 2009, after the global financial crisis began, “demand management continued to be the sole objective of the central bank. Fiscal policy has not changed much.”
Adam Posen shows that the cost of deflation, or keeping inflation low, is higher in OECD countries with CBI. Carl Walsh The same is true in the European Community.
Because Guy Debelle and Stanley FischerCB has sought to bolster its credibility by getting tougher on inflation, even at the expense of output and job losses.
Commit to Any target, independent CBs sought credit to keep inflation low. Surname deny other contributing factorsfor example, the reduced bargaining power and globalization of workers, especially with cheaper supplies.
John Taylorauthor of the CB mantra ‘Taylor’s rule’, which concludes CB “works unrelated to central bank independence de jure”. De jure CB’s independence did not prevent them from “deviating from policies that lead to both price and output stability”.
The in fact The independent US Fed has also taken “actions that result in high unemployment and/or high inflation”. When independent CBs are dedicated to pursuing low inflation, they have neglected their responsibility for financial stability.
CB’s indiscriminate monetary expansion during the Great Moderation of the 2000s created dangerous speculative and asset price bubbles, culminating in the global financial crisis (GFC).
Since GFC“The financial sector has become dependent on easy liquidity… To compensate for the low returns caused by quantitative easing (QE)…, has increased the risk profile of assets. their other assets, using more leverage and hedging interest rate risk with derivatives”.
Independent CBs also never acknowledge the adverse distributive consequences of their policies. This is true of both conventional policies, which involve interest rate adjustments, and unconventional policies, with bond purchases, or QE. All activated speculatecredit and other financial investments.
They have also helped inefficient and uncompetitive ‘zombie’ businesses survive. Rather than reverse the long-term decline in productivity growth, the decline since the GFC”steep and elongated“.
Worker ‘ Real wages remain stagnant or even fall, reducing the share of workers’ earnings and increasing income inequality. When the crisis occurred and monetary policies tightened, workers lost their jobs and income. Workers are hit doubly as governments pursue fiscal austerity to keep inflation low.
Dire consequences
The pandemic has seen unprecedented financial and monetary responses. But there is little coordination between financial and monetary authorities. Not surprisingly, larger fiscal deficits caused by the pandemic and monetary expansion have increased inflationary pressures, especially with supply disruptions.
This could be avoided if policymakers better coordinated fiscal and monetary measures to address key supply bottlenecks. War and economic sanctions have made the supply situation even more dire.
Government debt has increased since the GFC, reaching record levels due to pandemic measures. CBs raised interest rates to curb inflation, thereby exacerbating the public debt burden, leading to austerity measures.
Thus, countries go through a cycle of debt accumulation and output contraction. Supposedly to curb inflation, they adversely affect livelihoods. More developing countries face debt crises, further delaying progress.
Necessary reform
60 years ago, Milton Friedman asserted, “money is too important to hand over to central bankers“. He build“An economic shortcoming of an independent central bank… is that it almost always involves the dispersion of responsibilities… Another flaw… is the extent to which policy is implemented… is highly individualistic. … the third… the defect is that an independent central bank will hardly change overemphasizing the views of the bankers”.
So Friedman is skeptical of the government encourage“Either have the Federal Reserve become an office in the Treasury under the secretary of the Treasury, or place the Federal Reserve under the direct control of Congress.
“Either involves ending the so-called independence of the system…or will establish a strong incentive for the Fed to create a more stable monetary environment than we already have.”
Without a doubt, this is an extreme solution. Friedman also suggested replacing arbitrary CB with monetary policy rules to solve the problem of lack of coordination. But like Alan Blinder observed, such rules are “unlikely to score well”.
Effective monetary-fiscal policy coordination requires supportive institutions and appropriate operating arrangements. Like IMF research pointed out that “the regulatory independence of the central bank, neither the balanced budget provision nor the rules-based monetary policy framework… are not sufficient to ensure coordination of fiscal policy and efficient money”.
While rule-based policies can enhance transparency and strengthen discipline, they cannot create “credibility,” which depends on the policy content and not the policy framework.
For Debelle, the combination of “objective dependence” and “instrumental or operational independence” of CBs under strong parliamentary or democratic oversight may be appropriate for other countries. develop.
Also need to expand the membership of CB board to avoid dominance of financial interests and represent the broader national interest.
But macro-policy coordination is not merely an appropriate monetary-fiscal policy combination. A more rigorous approach should also incorporate sector strategies, for example, public investment in renewable energy, education and training, health care. Such policy coordination will enable sustainable development and reverse the decline in productivity growth.
As Buiter urges, it’s up to governments.”for proper use…financial space“Created by fiscal-monetary coordination. Democratic checks and balances are needed to prevent “pork sales” and other financial abuses and to protect fiscal decision-making from corruption.
IPS UN Office
By @IPSNewsUNBureau
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© Inter Press Service (2022) – All rights reservedOrigin: Inter Press Service
