The People’s Bankers?

Strategy reviews by many of the world’s central banks, notably the US Federal Reserve and the European Central Bank, have sharpened the debate about the role and limits of monetary policy. Besides maintaining price stability and, in some cases, supporting high levels of employment, should central bankers also actively help governments to tackle economic inequality and environmental threats?

In this Big Picture, Stefan Gerlach, a former deputy governor of the Central Bank of Ireland, applauds the Fed’s recent decision to incorporate inequality considerations into its policy framework, as well as ECB President Christine Lagarde’s efforts to push climate change up the ECB’s agenda.

Similarly, London Business School’s Hélène Rey urges the ECB to help Europe shift to a carbon-neutral economy by shifting its focus to core inflation indices that exclude energy and food prices. But former ECB chief economist Otmar Issing argues that policy decisions regarding income distribution and climate change must remain in the hands of elected governments and legislatures.

Stanford University’s John B. Taylor, who developed the so-called Taylor rule regarding central-bank interest-rate policy, also criticizes the Fed’s new “flexible” approach to inflation targeting, arguing that it represents a dangerous shift away from the more strategic, rules-based policy that the Fed had been pursuing at least since 2017.

As for Japan, Yale University’s Koichi Hamada, who was a special adviser to former Prime Minister Shinzo Abe, counsels the new government led by Yoshihide Suga to maintain the bold monetary policy pursued by the Bank of Japan since 2013.