The problem actually lies in the fact that a CBI is by definition not coordinating with the Treasury on fiscal policy, and in some cases might be forbidden to do basic things like buying government debt. The justification is the fear of inflationary pressures, while the truth might be closer to Kalecki's view that fiscal and monetary policy are used to maintain a significant level of unemployment to keep workers in line.Read it at New Keynesianism
Central Bank Independence not so well intentioned failure
by Matias Vernengo | Associate Professor of Economics, University of Utah
7 comments:
"... fiscal and monetary policy are used to maintain a significant level of unemployment to keep workers in line."
This is most definitely what it all boils down to.
I'm skeptical of the idea that central banks work to preserve unemployment to keep people in line. If that occurs it is a by-product of its chief goal I think. What central banks aim to accomplish is price stability, and that is because they serve and answer to the creditor class in the economy. Inflation erodes the profits from financial assets, and protecting the value of these assets is what the bank is all about.
Vernengo’s article is essentially a reaction to an article by Chris Giles, economics editor of the Financial Times. And according to Vernengo, Giles thinks “a well-informed public could have pushed the Bank of England to act more boldly after the 2007 financial crisis, and to be more prepared for the global crisis that started with the Lehman collapse in 2008.” Whaaaaat?
So the average plumber and convenience store owner can give economics PhDs working for central banks valuable advice on bank collapses, “global crises” etc????
What was the economics editor of the Financial Times smoking when he wrote that? 99% of economists failed to see the crunch coming, so what chance plumbers and convenience store owners seeing it?
It must be great being the editor or journalist with a newspaper. Seems you can write any old rubbish and get away with it, as Dean Baker has pointed out at least a thousand times on his blog.
Dan, if you're skeptical about how much central banks actually react to employment (hike interest rates when employment is high) see the paper by Jamie Galbraith I linked in the post below. Very strong evidence for the Fed. http://nakedkeynesianism.blogspot.com/2012/05/fed-up-with-full-empoyment-target.html
Thanks, Matias.
Also see Bill Mitchell and Joan Muysken's definitive work, Full Employment Abandoned (Elgar 2008), and Bill's many posts on NAIRU, for example.
Matias, aren't those results consistent with the view that the Fed mainly reacts to pressures or trends that it perceives as threats to its inflation target?
@ Dan K
And it uses a buffer stock of unemployed as a tool for hitting the target — which is contrary to it's mandate. Moreover, it uses the "natural rate of interest" as the point at which domestic saving = investment at FE and it defines FE in terms of "the natural rate of interest" that is, the level of unemployment at which prices are stability. That establishes full productive capacity for the economy. As Mitchell and Muysken point out, it's all based on wrong assumption. It is based purely on mistake, i.e., ignorance, or it is designed to discipline labor? Either way, it is over the top.
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