Tumblr Icon RSS Icon

Central Banking With a Clear Mandate

Posted on

"Central Banking With a Clear Mandate"

Share:

google plus icon

File:London.bankofengland.arp 1

There’s something that’s just incredibly clear and reasonable about this aspect of central banking in the United Kingdom:

The Bank’s price stability objective is made explicit in the present monetary policy framework. It has two main elements: an annual inflation target set each year by the Government and a commitment to an open and accountable policy-making regime. Setting monetary policy – deciding on the level of short-term interest rates necessary to meet the Government’s inflation target – is the responsibility of the Bank. In May 1997 the Government gave the Bank operational independence to set monetary policy by deciding the short-term level of interest rates to meet the Government’s stated inflation target – currently 2%.

The genius of this is that you now don’t need to have monetary policy matters be the subject of debates on op-ed pages and blogs with various board members giving interviews and speeches. If 2 percent inflation is too much inflation, well that’s on the heads of the politicians who set the target. If inflation is over 2 percent, then the Bank of England needs to tighten. And if inflation is below 2 percent, then the Bank of England needs to expand. Consequently, when faced with a giant downturn the Bank of England has had none of the self-induced paralysis of the Fed, the ECB, or the Bank of Japan.

America’s vaguely worded “dual mandate,” by contrast, looks like a recipe for disaster. As long as conditions stayed within a relatively narrow band and Maestro Greenspan was in charge, it all seemed to work out well. But faced with unusual conditions and unorthodox policy, we’ve gotten mired in a dynamic where each FOMC member seems to be freelancing with his own idiosyncratic interpretation of price stability and full employment.

« »

By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.