Central bank independence remains important for core inflation containment in the current age of political populism.

Jonah Whanau

2019-04-21 10:07:54 Sun ET

Central bank independence remains important for core inflation containment in the current age of political populism. In accordance with the dual mandate of both price stability and maximum sustainable employment, most central banks seek to solve the dynamic consistency problem on the basis of a key desire to insulate monetary policy decisions from political influence.

A landmark empirical study of cross-country comparisons by Alberto Alesina and Lawrence Summers confirms that countries with better central bank independence experience lower inflation without suffering any real economic output or labor force penalty. An independent central bank can enhance fiscal discipline by reducing the relative likelihood of fiscal dominance and monetization of perennial budget deficits.

Historical experience and economic theory teach us an informative lesson. When monetary policy is subject to political control, people expect dovish expansionary interest rate adjustments and so anticipate higher wages and prices in response. The undesirable economic outcome is stagflation (or the worst-case scenario of both high inflation and high unemployment). It can cost prohibitive welfare losses for the central bank to bring down inflation with subsequent interest rate hikes. Key credible apolitical monetary policy decisions would thus promote price stability with minimal real impact on economic growth, employment, and capital investment.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

All of the 18 systemically important banks pass the annual Federal Reserve stress tests.

James Campbell

2019-07-30 15:33:00 Tuesday ET

All of the 18 systemically important banks pass the annual Federal Reserve stress tests.

All of the 18 systemically important banks pass the annual Federal Reserve stress tests. Many of the largest lenders announce higher cash payouts to shareho

+See More

Larry Summers critiques that the Trump tax holiday for U.S. multinational corporations may cause inadvertent consequences.

Rose Prince

2017-01-17 12:42:00 Tuesday ET

Larry Summers critiques that the Trump tax holiday for U.S. multinational corporations may cause inadvertent consequences.

Former Treasury Secretary and Harvard President Larry Summers critiques that the Trump administration's generous tax holiday for American multinational

+See More

Anne Krueger explains why the Trump administration's current tariff tactics undermine the multilateral global trade system.

Fiona Sydney

2018-09-21 09:41:00 Friday ET

Anne Krueger explains why the Trump administration's current tariff tactics undermine the multilateral global trade system.

Former World Bank and IMF chief advisor Anne Krueger explains why the Trump administration's current tariff tactics undermine the multilateral global tr

+See More

Agile lean enterprises strive to design radical business models to remain competitive in the face of nimble startups and megatrends.

Joseph Corr

2020-10-13 08:27:00 Tuesday ET

Agile lean enterprises strive to design radical business models to remain competitive in the face of nimble startups and megatrends.

Agile lean enterprises strive to design radical business models to remain competitive in the face of nimble startups and megatrends. Carsten Linz, Gunter

+See More

The financial crisis of 2008-2009 affects many millennials as they bear the primary costs of college tuition, residential demand, health care, and childcare.

Peter Prince

2019-06-23 08:30:00 Sunday ET

The financial crisis of 2008-2009 affects many millennials as they bear the primary costs of college tuition, residential demand, health care, and childcare.

The financial crisis of 2008-2009 affects many millennials as they bear the primary costs of college tuition, residential demand, health care, and childcare

+See More

The financial services industry needs fewer banks worldwide.

Daphne Basel

2022-08-30 10:32:00 Tuesday ET

The financial services industry needs fewer banks worldwide.

The financial services industry needs fewer banks worldwide. As long as banks have existed in human history, their managers have realized how not all dep

+See More