Blanchard leads calls for more ‘democratic input’ in central bank decision-making

Viral Acharya, Olivier Blanchard, Richard Fisher, Otmar Issing and Klaas Knot debate new ‘paradigm’ of central banks with ever more responsibilities; Blanchard prescribes an injection of democracy
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Olivier Blanchard, the International Monetary Fund's chief economist, has called for changes to central bank decision-making, to allow a degree of "democratic input" where policies will have a significant redistributive effect.

Blanchard was joined in a panel discussion at the Deutsche Bundesbank by Viral Acharya, a professor of economics at NYU Stern; Richard Fisher, the president of the Dallas Federal Reserve; Otmar Issing, a former member of the board of the European Central Bank; and Klaas Knot, the president of the Netherlands Bank.

Panellists agreed generally that it was right for central banks to take on more responsibilities, particularly over macro-prudential policies, but identified a number of pitfalls. Principal among the difficulties was the tension between technocratic, unaccountable decision-making and the need to maintain independence.

Blanchard was initially cautious. "You want to keep credibility of the inflation goal, and you also want to not have too much of a democratic deficit," he said, adding that countries are currently trying to find ways of achieving this.

Later in the discussion however he went further, pointing to a number of Asian countries that allow the government to appeal against central bank decisions. "We have to think about ways of having some democratic input in those decisions that have a very strong redistributional effect," he said.

The bottom line is, we will be accepted from a democratic standpoint if we do not screw it up

Issing echoed this view. He argued that it made sense to combine macro-prudential and monetary policy mandates in one institution, but said there needed to be limits on that power. "The application of macro-prudential tools will have dramatic distributional effects, and for such distributional effects you need democratic legitimation."

Panellists highlighted the balance that needed to be struck between allowing politicians to interfere with their independence, and losing public confidence by being unaccountable and opaque.

Fisher added an element of realism: "The bottom line is, we will be accepted from a democratic standpoint if we do not screw it up. If we do it well, and we do not have another crisis, even if the structure given to us by the people through the Congress is an imperfect structure, then we come out looking healthy and our independence is less threatened."

Knot pointed out that monetary policy also has significant distributional effects, but the lack of democracy is generally accepted. He said there should be a "democratic discussion", and "the flipside of independence is accountability", but concluded: "I don't think it needs a fundamental rethink of the mandate."

Both Knot and Acharya emphasised that effective use of macro-prudential policies would avoid the need for "quasi-fiscal" central bank actions that could shake people's faith in their independence.

"I view the broader mandate as being a good thing, because if central banks focus on financial stability in good times and do not end up in the situation of making a lot of quasi-fiscal actions in the end-game, it will actually exonerate the central banks from all these independence and accountability issues that come about ex post," Acharya said.

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