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Central-Bank Catch-22

With fears of a global downturn growing, central bankers are once again faced with the grim prospect of bearing the full burden of macroeconomic management, with no policy support from elected leaders. Given the growing chorus of critics challenging central-bank independence, would monetary authorities be better off not confronting the next crisis too forcefully?

In this Big Picture, Allianz’s Mohamed A. El-Erian traces the origins of monetary policymakers’ current conundrum to the years after the 2008 crisis, when they assumed that their aggressive intervention would be met by a similar response from fiscal policymakers. And now that they have broken the seal on unconventional policies such as quantitative easing, Barry Eichengreen of UC Berkeley suspects that eschewing such measures in the future will be as risky as deploying them.

As if central banks weren’t facing enough challenges, Harvard’s Kenneth Rogoff identifies several other potential threats to their independence, and concludes that monetary policymakers should return to their traditional, more limited remit. But Patrick Bolton, Stephen Cecchetti, Jean-Pierre Danthine, and Xavier Vives, the authors of a recent report on central banking for VoxEU, think central banks have the tools available to embrace their expanded role both safely and transparently.

Stefan Gerlach of EFG Bank, moreover, notes that central bankers could do themselves a favor by being clearer with the public about their objectives and the strategy for achieving them. Alternatively, Benjamin J. Cohen of UC Santa Barbara proposes a workaround to the failure of legislators and other elected officials: a new fiscal agency with the same level of operational autonomy as central banks.

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