It is important to question the imperative that central banks should occupy their own autonomous policy space.
In a testimony before Congress in February, Republican Sen. Joe Kennedy tried to downplay US Federal Reserve Chairman Jerome Powell over whether he supported the 1.9 trillion stimulus plan. USD or not. Powell responded: “On every public occasion when I was asked about that, I have said it is inappropriate for the Fed to play a role in fiscal discussions on specific provisions in specific laws.” During the hearing, he dug a ditch around the bank’s narrow price stabilization mandate and declined to comment directly on anything that might be out of it.
This separation between fiscal and monetary policy also appeared in a heated discussion in Indonesia a few months ago. During the Asian financial crisis, the fall of the rupiah pushed Indonesia into the balance of payments crisis and subsequently Reforms led by the IMF formalize Bank Indonesia’s policy independence. This is aimed at isolating the country’s central bank from political influence as it performs its task of keeping the currency stable.
But by the end of 2020, on the heel of one Controversial omnibus bill to expand centralized state power in the name of economic development, a proposal to establish more direct government control over monetary policy. Many commenters were quick to describe this attempt as one attack on independence background of the central bank, and framing it as a negative will shake market confidence and lead to the plunder of public treasury. Under such a strong response, the proposal was put on hold.
But why should central banks be discouraged in their own autonomous policy space in the first place? Why should fiscal and monetary policy not be actively coordinated? Why do central bankers like Jerome Powell have to pretend they have no opinion on huge fiscal stimulus packages or tax cuts? The rise in money at the cost of fiscal policy reflects the triumph of Milton Friedman’s monetary philosophy that economic activity is best regulated through simple and neutral policy instruments such as interest rates. .
Essentially, currencyists believe there is one, or maybe a number, natural interest, economic growth can be maximized with steady inflation. Since this is believed by some to be a natural but unobservable threshold, naturally setting the best interest rate is for a neutral arbitrator who will administer policy in such a way. clinical consciousness. This is why central banks have become increasingly independent from what is perceived as politically filthier fiscal policy, leaving their own technocratic devices in pursuit of interest rates. perfect in equilibrium. In emerging markets like Indonesia, the goal is often to use these same neutral policy tools to create an optimal exchange rate.
But what if there is no natural interest rate? What if these supposedly neutral policy ratios actually reflect people’s political choices based on their best judgment? If so, then the logic of keeping fiscal and monetary policy separate from each other begins to weaken. Nearly 60 years ago, economist Wrote Joan Robinson that monetaryists prefer exchange rate policy because it “conceals the problems of political choice under an apparently non-personal mechanism.” She realized this value-neutral approach was appealing because of its non-individuality, and she rejected it, writing: “No policy is simply right; it is all a matter of judgment. “
If so, then such decisions should be made in close coordination with financial institutions, especially elected officials, who are accountable to voters. Bank Indonesia is currently make money billions of dollars government debt when the country has a large deficit to finance efforts to stimulate COVID-19. Such an operation requires close coordinated action between the central bank and the financial institutions, and there’s nothing wrong with that. We have the conditions to think differently, but fiscal and monetary policy are natural supplements, so why aren’t they more actively coordinated?
The exact form of such an arrangement is of course an open question. But the technocrats at Bank Indonesia who are really policymakers are very good at what they do. It is not fair to assume that undermining the divide between fiscal and monetary policy will automatically lead to mass theft, and if the markets falter in such coordination merely. Highlighting problems in getting Mr. Market has the final say on sovereign monetary policy. The demarcation line does not need to be broken, but the mention of the tighter central bank control that has been denied in Indonesia shows the extent to which Milton Friedman still lives in our heads. And as with Daylight Saving Time, the reasons why this seem to have been forgotten.