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A blog on financial markets and their regulation
There has been a lively debate in India on senior central bank officials criticizing monetary policy decisions in which they may have participated. This debate has tended to focus on the harm that such alleged indiscreetness can do, while I think the important question is how to design the conduct of monetary policy in a manner where open debate does not cause harm.
Consider this passage in a paper last month by a member of the US FOMC that decides monetary policy in that country:
The U.S. is closer to a Japanese-style outcome today than at any time in recent history. In part, this uncomfortably close circumstance is due to the interest rate policy being pursued by the FOMC.
Or this from a UK MPC member who last month titled his speech provocatively as “How long should the song remain the same?”:
The normal monetary policy reaction to a sustained period of above target inflation would be to tighten policy, to create demand conditions which are more conducive to restraining price increases and bringing inflation back to target. But so far, the Committee has not supported that course of action – and is keeping monetary policy extremely loose. …
Last month, however, I dissented from this approach and voted for a small rise in interest rates. And in today’s speech I want to set out the thinking behind my view of current economic prospects and the implications for UK monetary policy that led me to that decision. …
The MPC has a clear remit, which is to keep inflation on target at 2% over the medium term. … we need to adjust the policy settings we put in place to head off the downside risks to inflation identified in the immediate aftermath of the big financial shocks in late 2008 and early 2009.
I think such open debate and criticism strengthens the conduct of monetary policy by allowing divergent points of view to be heard and considered. Alternative analytical frameworks can thus be developed and are available to the policy makers if and when they choose to change their mind. My knowledge of either the theory or practice of monetary policy is very limited, but I like to believe that monetary policy is closer to a science that progresses through informed debate, rather than a dark art that derives its mystique and efficacy from a veil of secrecy.
Unfortunately, criticism of monetary policy decision by senior officials themselves can be prevented from doing harm only in a culture of transparency where minutes of monetary policy deliberations are published openly so that dissenting voices are not misinterpreted by the markets.