Central Banking & Monetary Policy: Systemic Upheaval Looms

Are we on the verge of a new model of central banking?

Whither central banking? This question has fallen by the wayside in the fever-pitch Renaissance drama that is Donald Trump’s Washington. Pundits and legislators are more captivated by swirling allegations of Russian collusion and White House infighting than by the relatively mundane domain of monetary policy. But that doesn’t mean we should overlook the first signs of what could be a momentous change in the way we do central banking in the 21st century.

The typical model of central banking is that of independence. The central bank is given a mandate by the national — or supranational, in the case of the European Union — government. Politicians may nominate officials to the governing boards of the central banks, but nominees’ terms are long, so for the most part central banking remains a technocratic endeavor, largely insulated from the capriciousness of domestic politics. As former Fed vice chair Alan Blinder argued in the mid 1990s, monetary policy is a technical practice that requires specialists with long-term outlooks at the helm; achieving the desired goal requires patience and prudence far beyond that of politicians, who by design are incentivized to think and act in the short term.

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