Central banks that introduced tools other than a policy interest rate to guide their economies may find their expanded roles imperil their political independence, International Monetary Fund staff said today.
“Independence is clearly still desirable with regard to price stability,” according to an IMF staff paper on the future of monetary policy. “But it may prove politically difficult under expanded central bank mandates.”
The critical issue facing central bankers may become “how to protect the independence of monetary policy decisions if the government chooses to exercise greater oversight on new central bank responsibilities, notably in the financial stability arena,” the IMF economists wrote.
The global financial crisis showed that long-run price stability, though a primary objective of monetary policy, “is not a sufficient condition for macro stability,” the paper said. Going forward, financial and external stability objectives “may play a greater role than in the past” and “interest-rate policy might have to play a role.”
The U.S. Federal Reserve is using an unprecedented asset-purchase program known as quantitative easing to boost the nation’s economy. The central bank is buying Treasuries and mortgage-backed securities at a $55 billion monthly pace, and is keeping its main interest rate near zero.
The Bank of Japan is also snapping up assets, flooding its market with funds to encourage more lending as part of a push to beat deflation.
Last week, European Central Bank President Mario Draghi said the monetary authority for the 18-nation euro area is ready to move deeper into uncharted territory in its own fight against deflation. ECB policy makers are debating what form of QE they might need to use.
“The use of unconventional policies proved that monetary policy was not powerless at the zero lower bound,” the IMF economists wrote, citing bond purchases and so-called forward guidance, which the Fed is using to signal the future path of interest rates. “Nevertheless, resilience of monetary policy frameworks to the risk of the zero lower bound is desirable.”
IMF staff wrote that the unconventional methods central banks are employing to provide stimulus with interest rates near zero should not become the norm.
“With the exception of forward guidance, the cost seems to exceed the benefits,” they wrote. “A related -- and still unsettled -- question is how one can avoid hitting” a near-zero rate again.
Finance ministers and central bankers are meeting later this week in Washington for the spring meetings of the IMF and World Bank.
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