I had blogged about this article by Howard Davies saying central bankers have become too big for their own good.
Mojmír Hampl, Vice-Governor of the Czech National Bank responds to this criticism.
Sweeping criticisms of developed-country central banks have lately become all the rage. The main line of attack goes something like this: monetary policymakers have been far too activist since 2008, overstepping their mandates and damaging the economy. This narrative – which, bizarrely, is equally popular among otherwise irreconcilable ideological adversaries, such as libertarians and neo-Marxists – is patently wrong.
What the critics fail to understand is that modern central banks are responsible not just for fighting inflation, but for maintaining long-term price stability. Like a person’s body temperature, price levels can go neither too high nor too low without causing serious complications. Central banks must be as “activist” when combating deflation caused by weak demand as they are when fighting high inflation driven by excessively strong demand.
Though the battle is completely symmetric, the public assessment of it is bafflingly lopsided, especially in countries with financially conservative populations. This includes my own country, the Czech Republic, a nation of small savers where the loan-to-deposit ratio remains well below 100%. Czechs fear inflation, even though it hit a 13-year low last year and the Czech National Bank, of which I am Vice-Governor, has been fighting to avert the risk of deflation since 2013.
Another common complaint about developed-country central banks’ policies since 2008 is that they have redistributive effects. They certainly do, but so what? Any and all monetary-policy actions redistribute wealth. An interest-rate hike pleases savers, whereas a rate cut is a boon to borrowers. Importers prefer a strong exchange rate; exporters prefer a weak one. To make any sense at all, monetary policy must have different effects on different groups at different times. That is no mistake; it is the essence of monetary policy.
Some critics add that central banks are failing to hit their inflation targets anyway, so their activism is not only unwarranted, but also ineffective. Sometimes they even manage to fit these contradictory criticisms in the same sentence, as though they were accusing someone of firing blanks, but somehow leaving people dead and wounded.
The reality is that central banks in the developed world have – in a truly fascinating way – succeeded in maintaining price stability and the purchasing power of money during and after the global financial crisis. Had they not intervened, their economies would have faced catastrophic deflation, major asset-price slumps, and a complete meltdown of the financial and real sectors. Clearly, strong action was the right response to the crisis (the extent to which central banks might have contributed to its outbreak is another matter).
Each one to his own..