A very senior economist of my acquaintance said this in an email today (due to Chatham House rules I cannot disclose who):
If mainstream monetary theory cannot explain fluctuations in prices and activity, it is surely wrong to subordinate macroeconomic policy to an inflation target.
That pretty much kills dead the whole debate on central bank independence in my opinion. I was most amused.
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Compelling. But I cannot laugh because I see the real results of shitty economic thinking everyday.
Sort of like driving a car where the steering wheel isn’t connected to anything and the brakes don’t work either. I wonder if the Queen has any thoughts on this.
There’s something wrong with that sentence to my mind. Whilst the author is correct about the current state of economic thinking being unable to fully and coherently explain fluctuations in prices and activity surely his sentence should read:-
“If mainstream monetary theory cannot explain fluctuations in prices and activity, it is surely wrong to subordinate macroeconomic optimisation policy primarily to monetary manipulation whilst irrationally believing fiscal policy should only be used to balance the government’s books.”
I confess your alternative does not work
The debate was not about balancing books, for a start. That did not come into the discussion
I’m construing the author’s sentence to mean:-
If mainstream monetary theory cannot explain fluctuations in prices and activity, it is surely wrong to subordinate macroeconomic policy to “only a monetary” inflation target.
That is exactly what I think he meant
But the independent CBs are very useful distractions……
I remember Warren Mosler making a very apposite observation about central bank independence as a means to control the economy. He said, its as if the Chair of the Fed is sat in the backseat of a car with a child’s steering wheel and Congressional Finance Minister is sat up front behind the real steering wheel but with their hands out the window, and he’s asking his back seat passenger, ‘hows it going?’ as the car drives off a cliff! Sound familiar?
That’s about it