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The Future of Central Banking

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The exteriors of major central banks may be solid marble and doric columns, but, inside, monetary policy remains a work in progress.

The officials inside have to craft a policy framework that makes the most efficient use of instruments of varying potential effectiveness, and show responsiveness, but not subservience, to external political pressures.

Of late, the changes have come at a dizzying pace in a culture that usually measures regime shifts in terms of generations. In just a few months, we welcome a new Governor at the Bank of England, a new communications policy at the Fed, and a new determination at the Bank of Japan to hit a higher inflation target.

Not all change, though, represents progress. I am particularly concerned by the increasing desire of officials to tie monetary policy to real outcomes. This is best exemplified by the instructions handed down by the prime minster of Japan. Minister Abe held on January 11 that “We would like the BoJ to take responsibility for the real economy. I think that means jobs. I would like the BoJ to think about maximising jobs.” The Fed’s setting of a threshold for the unemployment rate, and the suggestion that a nominal income target be adopted in the UK, whereby real output growth and inflation get equal weights, go in the same direction.

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