One of the accepted wisdoms of economics before the crisis was that Central Banks should be independent of political influence when deciding on day-to-day policy actions consistent with their long run goals – although these long run goals (typically inflation targets) – would be chosen by political leaders. This view relied on both empirical and theoretical work that linked this arrangement to outcomes such as low and stable inflation (work which was heavily influenced by Western Economics).
The ongoing crisis has led some to argue not only that this era of Central Bank independence is about to end, but that it should end as monetary policy should be more supportive of fiscal policy in highly leveraged economies (see the attached articles from the WSJ and FT). This view is also tied to the recent (seemingly insane? – see "Why Stop," from the WSJ) suggestion of some that the way to deal with the U.S. debt ceiling issue is to have the Administration issue a trillion dollar coin which could be deposited by the Treasury at the Fed (see "Economics of Platinum Coin" from The Economist's Free Exchange site).
So, are we at a turning point for Central Banks and monetary policy? If so, is it time to prepare for high inflation?
See you at the FUBar.
