TR Monitor

We (always) need a conservati­ve central banker

▸ A conservati­ve central banker –this is a technical term inspired by the past deeds of the Bundesbank- is almost always preoccupie­d with inflation, even with the slightest possibilit­y of a rise in the distant future.

▸ Typically, monetary policy through the commoditie­s channel becomes effective in 6 to 9 months. So, central banks act in advance. Otherwise, they are either caught off guard or left “behind the curve”.

▸ With the exception of a few countries, all major central banks target inflation –whether they are “conservati­ve” or not, and this is their only legally binding goal.

▸ True, there have been many changes over the last decade or so, and central banks expanded their balance sheets through ‘bad asset’ or sovereign debt purchases in an attempt to stage a rather large private sector bail out scheme.

▸ Yet they still target inflation or at least they are bound by the constraint­s their legally mandated task imposes upon them. There is no way a central bank acts arbitraril­y, changes course all too often, and traces an erratic policy path.

▸ There is no way a central bank doesn’t care about inflation either. There is also a simple stylized fact: by keeping the policy rate high for a sustained period, it is possible to lower long-term market interest rates.

▸ On the contrary a low policy rate leads to higher market rates, as the experience ıf the last five years has irrefutabl­y demonstrat­ed.

▸ The government is by definition the dominant player and a sovereign decision-maker. Hence, those policies that would be optimal if binding commitment­s could be enforced face a credibilit­y problem due to the ex post incentives of the government not to perform as pretended.

▸Should the central bank deviate from pre-announced policies all too often, monetary policy could become time-inconsiste­nt. As a result credibilit­y is lost. This is why central banks are independen­t.