Ray Barrell's picture
Affiliation: 
Brunel University London
Credentials: 
professor of economics

Voting history

The Future of Central Bank Independence

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Question 3: More generally, do you agree that it is desirable to maintain central bank independence? Again focus on the near future, say next 48 months.

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Answer:
Agree
Confidence level:
Confident
Comment:
Central banks have changed in recent years, resuming their financial stability role. This means that they are much more involved with fiscal policy makers. The Great Moderation saw unwise innovations separating stability from the monetary authorities, and this probably worsened the crises we saw from 2007 onwards, as it reduced the speed and efficiency of reactions. Independence over interest rate setting in relation to politically set inflation targets is wise, and probably will be maintained over the next 48 months. Polities will have to reflect on the causes of crises, and these are seldom located in loose (or tight) monetary policies, but rather result from legislation changes to ‘enhance financial efficiency’ or policies to protect local financial elites from market pressure. We may see ‘efficiency’ legislation in the US, and this could raise the risk of a financial crisis there, and will impinge on Fed independence.

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Question 2: Do you agree that the traditional argument that less central bank independence leads to higher inflation will (still) be relevant over the next 48 months in Western economies?

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Answer:
Disagree
Confidence level:
Confident
Comment:
In general the link between independence and inflation has been more tenuous than the academic profession suggests. Some years ago Posen suggested that independence was the result of the desire for low inflation, not the cause of it. That argument remains sound. Inflation in the short term is little influenced by central bank actions, and many of those arguing for less independence want to see less monetary expansion and higher interest rates. This would reduce inflation, not raise it. An increase in inflation as a result of a decline in independence could come from a sharp revision to inflation expectations by price and wage setters. Although financial markets may believe that independence reduces inflation, it is not clear that this view has spread to the wider economy. Marginal reductions in independence are unlikely to affect expectations, and inflation is unlikely to rise in the UK and the Euro Area as a result of any changes. However, in the US we could see legislation and pressure that would induce lower interest rates than would be normal in the face of fiscal expansion. Hence we could see a rise in inflation there well before the end f 2018 because the Fed became more politically pliable.

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Question 1: Do you agree that central bank independence in the Eurozone and the UK will decline over the next 48 months?

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Answer:
Disagree
Confidence level:
Not confident
Comment:
It is unlikely that central bank independence will decline markedly in either the UK or the Euro Area in the next 48 months. In both cases significant changes would require legislation or even treaty change for the ECB, and this is unlikely to happen in such a short period. Increases in oil prices, and for the UK a devaluation, mean that inflation will rise toward target in both areas. Interest rates will follow upward, and quantitative easing will become much less prominent. Hence some of the political pressures for less independence will be diluted.

German Council of Economic Experts' view of ECB policy

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Question 2: Do you agree that the ECB's monetary policy masks structural problems of member states?

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Answer:
Disagree
Confidence level:
Confident
Comment:
The ECB's policies have not masked structural problems, but these have been made more difficult to deal with by a fiscal policy stance that has been tighter than needed in most European countries. Nominal growth in Europe is likely to rise sharply in 2017 as the depressing effects of the fall in the oil price stop impacting on inflation. Few countries in Europe are running fiscal deficits that will cause debt stocks to rise as a percent of GDP. Structural problems still persist in Europe, and they reduce equilibrium output and raise sustainable employment. Labour and product market restrictions may also reduce the speed at which an economy can move when it is not at capacity. However, none of these factors stop growth being sustainable, and this is more likely to arise from a shortage of demand, and especially from tight fiscal policies. Public financed infrastructure investment in most European economies would help reduce structural problems, and reductions in unemployment amongst the young and the unskilled in countries such as Spain, France and Italy would leave space for structural reforms to labour protection and employment legislation. It is important to remember that Europe is not Germany, and the rest consists of much more than Greece. Policy needs to be set, and criticised, in relation to the whole of the Euro Area, not just its extremes.

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Question 1: Do you agree that exceptionally loose monetary policy by the European Central Bank is no longer appropriate?

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Answer:
Agree
Confidence level:
Very confident
Comment:
Exceptionally loose monetary policy. There is clearly a good case for the ECB to modify its monetary stance. Inflation is expected to rise toward target in 2017 as oil prices have strengthened and some European economies are close to full capacity. How much scaling down of asset purchase schemes is required depends on factors such as changes in the stance of fiscal policy in the Euro Area and elsewhere. Asset purchases were a wise response to excess capacity and negative inflation in the Euro Area, and perhaps should have been introduced earlier. The sharp decline in oil prices at the end of 2014 made the ECBs task much harder, as it brought inflation down to levels that required unusual measures to help expand demand after the Euro Area crisis affected the economies in 2012 to 2014. Historically low real interest rates globally left little room for traditional methods of monetary expansion when inflation was close to zero. Hence unusual measures were called for. They will no longer be needed unless fiscal policy is tightened across Europe.

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