This morning one of the most circulated newspaper item is how India’s FM has asked India’s central bank to march in steps with government. So RBI should cut rates along with government’s new found vigour for reforms. This talking by one authority on other’s roles is interesting. Central banks talking on fiscal policy and fiscal on central banks. The debate is always open whether it should be encouraged at all.
Julien Allard, Marco Catenaro, Jean-Pierre Vidal and Guido Wolswijk of ECB look at the issue though from a different angle. They look at central banks which talk on fiscal policy. The focus of central bankk communications is on mon policy. This one looks at key central banks and whether and how they communicate their views on fiscal policy:
While the established literature on central bank communication has traditionally dealt with communication of monetary policy messages to financial markets and the wider public, central bank communication on fiscal policy has so far received little attention. This paper empirically reviews the intensity of central banks’ fiscal communication by five central banks (the US Federal Reserve, the ECB, the Bank of Japan, the Bank of England and the Swedish Riksbank) over the period 1999-2011. To that end, it develops a fiscal indicator measuring the fiscal-related communication in minutes or introductory statements.
Our findings indicate that the ECB communicates intensively on fiscal policies in both positive as well as normative terms. Other central banks more typically refer to fiscal policy when describing foreign developments relevant to domestic macroeconomic developments, when using fiscal policy as input to forecasts, or when referring to the use of government debt instruments in monetary policy operations. The empirical analysis also indicates that the financial crisis has overall increased the intensity of central bank communication on fiscal policy. It identifies the evolution of the government deficit ratio as a driver of the intensity of fiscal communication by central banks in the euro area, the US and Japan, and for Sweden since the start of the crisis. In England the fiscal share in central bank communication is related to developments in government debt as of the start of the crisis.
I think it was Willem Buiter who said central banks are in no business to talk about fiscal policy and stick to monetary policy. Post-crisis, fiscal policy clearly has taken centre-stage with wide fiscal deficits and huge consequences. The central banks are more worried over state of fiscal than on state of monetary. Communications over fiscal policy has increased dramatically sicne the crisis.
What about other way round? Am sure even fiscal policy guys are talking more on monetary policy? Or has it always been the case when the governments feel c-banks are not doing their jobs properly.