The Central Conundrum – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-citings/the-central-conundrum/articleshow/88461880.cmsSynopsis

At every occasion, central banks have erred on the side of short-term caution, almost irrespective of the longer-term consequences. And this will not change any time soon.

At every occasion, central banks have erred on the side of short-term caution, almost irrespective of the longer-term consequences. And this will not change any time soon. Indeed, even when they embark on removing all the exceptional monetary policy stimulus – a process that the Federal Reserve will lead given the more advanced stage of economic healing in the US – the result will be what I have called the ‘loosest tightening’ in the history of modern central banking….

It needs to be stressed that the fundamental problem confronting central banks is their ability to effect systemic and lasting change…. Moreover, the destiny and future standing of central banks are no longer in their own hands.

There isn’t much central banks can do to improve countries’ growth engines. These institutions have neither the expertise nor the mandate to pursue reforms in education and labour markets. They are not in a position to lead national and regional infrastructure drives. They simply do not have the power to influence fiscal reforms, let alone impose them.

Central banks can do a little bit more when it comes to the problems of inadequate demand and debt overhangs – though, again, we need to understand that because they are just one part of the required policy response, their efforts come with unintended consequences, including increasing the risk of financial instability down the road.

From “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse”

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