The New Governance in Monetary Policy: A Critical Appraisal of the Fed and the ECB (original) (raw)

2007, Aspects of Modern Monetary and Macroeconomic Policies

The term 'governance' refers to the decision-making processes in the central bank and to the relations between the central bank and the government and/or the elected representatives. Governance comprises the traditions, institutional design, mandate, accountability, communication strategies and processes that determine how power is exercised, how citizens are given a voice, and how decisions are made on issues of public concern. For the last fifty years, four monetary policy regimes succeeded each other. A special kind of governance corresponds to each monetary policy regime. First, until 1974, for the Keynesian regime founded on the Keynesian synthesis, the government managed directly the economic policy. The monetary policy was only one element of the global policy and under the discretion of the government. Second, from 1974 to 1982, the Monetarist regime developed the monetary policy rule. Svensson (1999, p.636) calls this monetarist policy rule monetary targeting. The monetary policy became self-governing. The rule versus discretion debate shed light these both outdated monetary policy regimes. But if the rule (quantity theory of money) must be respected, Friedman said nothing about a specific organisation of the central bank. The theoretical framework changed; not the institutional design. Third, during the 1980s, the basic Friedmanian policy has evolved with the rational expectations revolution. Kydland and Prescott (1977), Barro and Gordon (1983) or Rogoff (1985) provide new decisive arguments in favour of rule, and against discretion. These are the famous dynamic inconsistency, inflation bias, reputational equilibrium, strategic delegation to a conservative banker, contract, incentive compatible mechanism. The New classical Economics (NCE) has developed the Credibility literature to propound alternatives to the rule issuing from the quantity theory of money. The simplified chain of this new regime, called credibility strategy is: Rule-Commitment-Enforcement-Independence-Transparency-Credibility. The great novelty was the institutional design: the independence of the central bank has become a necessity for the credibility. The credibility strategy is minimalist governance, since the central bank is fully independent. Respect of the rule and transparency are enough.