Central Banks Seek an Edge in a Game They Can’t Win
The old strategies aren’t working as well anymore because the board has changed.
Don’t change strategy. Change the game.
Photographer: Lucas Barioulet/AFP/Getty Images
Monetary-policy specialists are furiously exploring ways to improve central banks’ effectiveness, particularly should economies fall into a recession — a risk heightened by the coronavirus’s cascading economic stop. The underlying policy motivation is the growing recognition that prolonged and excessive reliance on central banks has reduced the power of both conventional and unconventional measures; it has even risked making them counterproductive. The hope is to come up with new tools to reverse this worrisome and accelerating phenomenon.
As important as this work is, I am worried that basic misperceptions risk making it unsuccessful when central banks face growing pressures both from within and without. To understand why, let’s look at this through the prism of game theory.