On the Subject of Central Bank Independence...

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The global economic and financial policy community is in the midst of a feverish debate over two related questions. First, are central banks globally losing their independence? And second, what would the loss of central bank independence mean for the future workings of the global economy?

But there's the other side of the coin. With a government-controlled central bank, how reliable would long-term bond yields and other financial market indicators be in warning of the need for policy change? Certainly, financial markets have hardly been a perfect indicator of coming financial instability as shown during the global financial crisis. Would financial market indicators do better at forecasting coming macroeconomic trends including issues related to price stability? To what extent is the Federal Reserve--because of the global role of the dollar--a special case in addressing these questions?

We are living in a world where things we thought would never happen are happening. What would be the significance of a global economy with central banks, including the Federal Reserve, de facto or otherwise under government control?

MOHAMED A. EL-ERIAN

Chief Economic Advisor, Allianz; Chair, President Obama's Global Development Council; and author, The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016)

Go beyond what is expected from you and you risk people expecting even more. If you fail to deliver on such elevated expectations, they will remember you less for what you achieved and more for what you failed to.

In a way, this is the story of central banks in the last eleven years; and it's one that could have repercussions for their effectiveness going forward, as well as for the overall wellbeing of economies.

Having responded boldly to the global financial crisis and helped the world avert a multi-year depression, central banks now are increasingly victims of their own courage--the courage to go beyond their traditional tools and, some would say, narrowly defined mandates to take on almost single-handedly the broader policy responsibility to deliver higher growth.

Yet even innovative unconventional tools could not get to the heart of an economic malaise many years in the making, and that was spilling over into the political and social domains. And by being limited to the asset channel for promoting economic growth, the best this policy approach could hope for was to buy time for the economies in anticipation that less polarized domestic politics would open the way for more comprehensive policy responses. Moreover, the benefits were not without costs and risks.

The hope of a more policy-enabling environment has given way, particularly in Europe, to the realization of a protracted period of political polarization, complicating the central banks' exit.

Having found it easier to rely on central banks rather than come up with the needed policy responses, a growing number of politicians are now blaming central banks for every dip in growth momentum. Highly indebted economies, such as Italy, expect their monetary authorities to continue to support the price of their bonds. Many point to how their use of the asset channel contributed, albeit inadvertently, to higher wealth inequalities.

Others now argue that there is no visible limit--whether in inflation, high interest rates, or worsening sovereign risk indicators--to direct large-scale central bank funding of government deficits (the extreme of this view being advocated by some proponents of MMT, or Modern Monetary Theory). And elsewhere, worries continue to mount about the unintended consequences of unconventional policies, including the $10 trillion in bonds that now is trading at negative yields and challenging the provision of essential long-term financial protection products to households (such as life insurance and pensions).

If they are not careful, central banks could soon face a daunting coalition of critics united by varied complaints but hugely dispersed when it comes to what the banks should do. Already, nominations for influential central bank policy committees have included people with limited economic and financial expertise. Indeed, on the current trajectory, it would only be a matter of time when outright political appointments become a high probability event. With that comes direct threats to operational autonomy, a hard-fought feature of modern central banking that is critical to both defense and offense for economic wellbeing.

Policy autonomy is why central banks have established themselves as credible and effective first responders to economic and financial crises. It is also why destabilizing and, at times, irresponsible monetary financing of persistently large government deficits became much less of a threat to economic wellbeing. Now both are increasingly at risk.

There isn't much that central banks can do other than hope that good political sense will ultimately prevail. Their fate remains in the hand of politicians. The more-timely adoption of a comprehensive pro-growth policy approach, particularly in Europe, would help reduce the operational risks to institutions that are often not well understood even though they play such a critical role.

RICHARD N. COOPER

Maurits C. Boas Professor of International Economics, Harvard University

We have made a fetish of the independence of central banks. There are good reasons for the "independence" of central banks, but also good reasons against it. The best reason is not "time inconsistency" as some economists claim--we could put monetary policy on autopilot to achieve that, but that would be dangerous, and absurd. Any social or political institution should be able to change its position when relevant circumstances change--including, in a democracy, when public sentiment changes significantly. The fetish reflects a particular theory about how monetary policy works in all modern economies, for all time.

The Federal Reserve system is independent of the sitting president of the United States, in that he cannot order the Fed to respond to his wishes. But it is not independent of the Congress, which with suitable majorities could change the laws which govern the Fed. There are usually many proposals (bills) for changing the law, but fortunately actual legislation is rare. Presidents have tried to influence monetary policy over the decades. Richard Nixon privately urged Arthur Burns, chairman of the Fed in the early 1970s, to pursue easy monetary policy before the 1972 election. Ronald Reagan, we learned recently, privately urged Paul Volcker not to tighten in the early 1980s. Donald Trump very publicly urged Janet Yellen and then Jerome Powell to lower interest rates. The Fed should pay attention to such sentiments, and others, but in the end should make its own decisions, following its interpretation of its legal mandates. (For example, it has interpreted its mandate to preserve "price stability" as targeting an annual rise of 2 percent of its choice of a suitable index--sensibly, in my view, in part on grounds of a serious upward bias in the consumer price index, the most widely used index of prices.)

"Independence" has gone too far in the case of the European Central Bank, established by the Maastricht Treaty of 1993 and amendable only by unanimous agreement of the now twenty-eight members of the European Union. And its mandate, unlike that of the Fed, is only to preserve price stability (also sensibly interpreted with some flexibility). It includes nothing about economic growth, high employment, or even an injunction to support stability of the financial system. The ECB has so far been managed by experienced financial officials who have employed a degree of common sense in attempting to stabilize the European financial system during the so-called euro crisis of mid-decade. But one can imagine an ECB run by more rigid and dogmatic persons--they exist in Europe--in which it presided over a financial collapse. More "political interference" would be desirable on such an occasion. The European Council of Ministers should have a voice in ECB decisions, or its mandate should be amendable by the European Parliament.

PETER R. FISHER

Tuck School of Business, Dartmouth College, and former Under Secretary for Domestic Finance, U.S. Department of the Treasury

In an important sense, the central banks have already lost their independence; we just have not yet had a chance to observe it. Having volunteered themselves with quantitative easing to conduct quasi-fiscal policy with their balance sheets, they will not have a principled basis on which to resist the request or the legislative directive of their governments to do more of the same. The central bankers' recent silence in response to the growing academic consensus that QE and lower for longer cannot be shown to have generated a meaningful increase in aggregate demand will open the...

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