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?
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.
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.
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.
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.
Question 2:Do you agree that the German government should increase public spending given its persistently large current account surplus and given that it is part of the Eurozone?
German fiscal policy should obviously be set in line with the objectives of the German polity. These objectives include having enough saving for old age and a desire to increase profits from exporting technology into plants abroad to serve foreign markets through Foreign Direct Investment. The former may require current account surpluses, but it is not clear the latter does. In addition maintaining the current set of compromises that keeps Europe at peace is also a clear objective of most German policy makers. The scale of German current account surpluses is putting that political compromise under pressure. The evidence suggests that a fiscal surplus in an economy at full employment will be largely reflected in a current account surplus, and a reduction in the fiscal surplus will reduce the surplus. A rise in German public investment, for instance, will reduce the surplus in two ways, firstly through demand and secondly through competitiveness. Although road building may have a limited import content, at the first round, the workers employed spend their incomes, and two fifths of that may be on imports. In addition the increased level of demand will raise real wages and prices. A lower current account surplus will be associated with a higher real exchange rate, and in EMU this can only be achieved by having German inflation higher than that in its partners for a period (but not permanently). A current account surplus reduction of one percent of GDP may require a two percent higher real exchange rate. This would mean German inflation would be one per cent higher than otherwise for two years, and the German government budget surplus would have to be one to two percent lower. A political compromise on this would make sense for the German people as well as for the rest of the Eurozone.
The CFM surveys informs the public about the views held by prominent economists based in Europe on important macroeconomic and public policy questions. Some surveys focus specifically on the UK economy (as the CFM is a UK research centre), but surveys can in principle focus on any macroeconomic question for any region. The surveys shed light on the extent to which there is agreement or disagreement among these experts. An important motivation for the survey is to give a more comprehensive overview of the beliefs held by economists and in particular to include the views of those economists whose opinions are not frequently heard in public debates.
Questions mainly focus on macroeconomic and public policy topics. Although there are some questions that focus specifically on the UK economy, the setup of the survey is much broader and considers questions related to other countries/regions and also considers questions not tied to a specific economy.
The surveys are done in collaboration with the Centre for Economic Policy Research (CEPR).
The Future of Central Bank 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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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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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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Question 1: Do you agree that exceptionally loose monetary policy by the European Central Bank is no longer appropriate?
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German current account surpluses
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Question 2: Do you agree that the German government should increase public spending given its persistently large current account surplus and given that it is part of the Eurozone?
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