Should Central Banks Be Responsible for Saving the World?

make the world a better place. And the senior policymakers in question were all women. That panel was part of a special conference on macroeconomics and finance co sponsored by the European Central Bank and the European think tank, the Center for Economic Policy Research, and it wasn't so different from other academic conferences I've been to, interesting cutting edge papers on topics like the impact of monetary policy on racial inequality or whether low interest rates make the economy

less efficient. While they were interesting to me anyway, the only thing that was different about this super brainy conference was that every single one of the contributing speakers was a woman. Now, you might not think this kind of statement. Women's conference was really necessary in this day and age. Don't you find senior women economists popping up all over

the place, But you'd be wrong. As the President of the European Central Bank, Christine Legarde explained when she launched the event, the twenty twenty report published by the American Economic Association shows that women make up only twenty of the PhD granting economics faculties in the United States, and most of those women do not hold tenure tribal positions.

And the share of female fool professors is only in Europe, and it is estimated that the figure is that we have at the moment actually decreased to twelve when considering top research institutions and more senior position. So it's not a very rosy picture, despite sometimes the impression that we have that a lot of progress that has been made. No, and this gender imbalances need to be addressed, broadening women's participation in the economics profession and removing the obstacles they

are they face pursuing a career. It's not just a matter of fairness, which in and of itself would be sufficient, but it's also needed because preventing women from participating and achieving leadership roles. It's just detrimental to society as a whole.

There have been multiple studies pointing to that. A recent one by the International Monetary Fund, of course, found that the presence of women on the boards of financial and supervisory institutions was associated did with greater resilience, less risk taking, an increased stability. No, maybe we don't want any of that. But I have my hunch that maybe we want stability, maybe we want a bit less risk taking, and maybe

we design greater resilience. And that is the reason why it is so important to have events like today's conference, not just to advocate and identify obstacles, as I have just done, but to show that we mean business and the research that we conduct and the policies that we recommend and the analytical work that is behind it is of superb quality. When we'll demonstrate perfectly that of course

we can do it, and of course women business. Now, as I said, most of the conference was a bit technical, but that planel I hosted at the end of the first day was on a subject everyone ought to care about the social responsibilities of central banks, and the lineup, well, it doesn't get much better. You can judge for yourself in this edited version of our conversation and enjoy. After this great day of academic and path breaking discussion, we have a big topic to discuss, how central banks can

support a new social contract. Now I'm conscious that some would say, maybe many would say, that the best way for central banks to support a new social contract is to keep well clear and to focus just on their knitting, on controlling inflation and letting politicians worry about things like society,

because that's what politicians are elected to do. And if our conception of a better social contract in this discussion is going to also include an effective response to climate change, which suspect it will, I think there are many people who have been who have said that central banks should

keep well clear of that too. But if we've learned anything, especially in the response to the global financial crisis in the pandemic, it's the central bank policies can have very big social and political consequences, whether we like it or not. We'll be talking about all of this and much more in this session, so let's let me get on with

introducing them and we can get started. Um. Dr Isabel Schnabel has been a member of the European Central Banks Executive Board for since the start of She's also been a member of the German Council of Economic Experts, and I think it is still a professor of financial economics at the University of Bonn Baroness minus. Chefik is now director of the London School of Economics, having more or

less run out of senior policy jobs to do. Before that, she's served as a Deputy Governor of the Bank of England, as senior civil servants at the International Department of International Development in the UK, and as senior official at both the i m F and the World Bank. She also just happens to have written a book What We Owe each Other a new social Contract recently, which I suspect

will will come up in this discussion. And finally we have Dr Carmen Reinhardt, very well known to everybody here, I know, Chief Economists of the World Bank since last year and currently on leave from her position as Professor of the International Financial System at Harvard's Kennedy School of Government. Ladies, welcome, so glad to be here, Minutia Fik, thank you so much, Stephanie.

The core Mandate of Central Banks and the best thing we can do for the social contract is to deliver both price and financial stability, because we all know that episodes of high inflation hurt the poor the most, and we've seen that in many many countries, and so and similarly with episodes of financial and stability because they have the least fewest tools to ensure themselves and protect themselves

from those shocks. But I also think that central banks need to be aware of the social consequences of their policies and also be aware of how social policies affect central banking. And let me just give two examples on the first point, how their policies affect social and political consequences. There's been a huge debate, as we all know, around how recent fairly aggressive monetary policies and quantitative easing have affective income distribution, and there's been quite a lot written

in central banking circles around that. Now we know that the effect of monetary policy on income distribution is complex and operates through multiple channels. Lower income households are more likely to lose their jobs during recessions, and so looser monetary policy is likely to increase employment and be good

for them. On the other hand, richer households tend to have more assets and are likely to benefit from loose monetary policies through the asset price channel, and so the net effect is an empirical question, and it can vary across countries and across times. Now, I don't think central banks should be setting monetary policy with a view to altering income distribution, which is a deeply political thing and

should be left in the hands of elected politicians. As Stephanie implied them from introduction, the central banks should be aware of the consequences of monetary policy for income and wealth and collect data on these impacts and provide analysis to the fiscal authorities so that they are well informed

and if necessary, can act on that information. They should be paying attention to whether their policies have different impacts on different groups like women or different parts of a country, and again not to alter their policies, but to inform those whose mandated is to worry about those issues about the potential consequences. Let me give an example of the opposite point, which is how do so show and political

policies affect central banking. One of the most important debates we're having these days is you know why the debate about secular stagnation. Now we know interest rates or have been at historic lose because global savings is high relative

to global investment. And why are global savings high Because people face insecurity and populations are aging, which is why of course interest rates are lowest in the parts of the world that are aging the most, like Japan and Europe, and this results in a tendency to hoard savings, which reduces demand for goods and services and slows rates of economic growth. And if we had better social insurance, we

could reduce this risk of secular stagnation. So, for example, Chinese households save about thirty of their incomes, in part because until recently they didn't have unemployment insurance or health insurance or reliable pensions. And so as social insurance is increasingly introduced in China, those really high savings rates could come down. And on the other side of the equation, investment is very low because governments haven't created an environment

where firms see good opportunities to grow. But many elements of the social contract, such as more investment in education or infrastructure to reduce carbon emissions, could actually increase demand, especially in developing countries where profitable opportunities exist if risks can be reduced. And so the problem of secular stagnation is not one that central bankers and monetary policy can solve,

but a better social contract could. And so central bankers should be happy to see policies like social insurance or support to families and education, or green investment incentives because they helped reduce the need for precaution re savings, they increase the level of global investment, and they help us avoid the risks of secular stagnation. So I would I would close that coming right hot. Thank you Stephanie, and thank you for for the organizers to to invite me

to this wonderful event. I also have to say that we are well passed the view where you know central bankers are uh these suit clad men uh that we have typically associated with central banking. Very much thanks to Janet Yellen and and and Madame Legarda and of course many others around the world. I do want to echo very much what we knew should pointed out on on the importance of not short changing the mandate of price stability. One thing that hasn't been mentioned in the panel is

that headline inflation does grab. That's why it's called headline UH the attention of the public. But at the very near nitty gritty level food price inflation, which usually UH exceeds headline inflation. In effect, relative food prices tend to increase disproportionately, So we can't lose sight that that inflation as a whole is extremely regressive. It is regressive for many of of the reasons that the panel is have pointed out, but I would add that the food dimension

is critical. I would stress that an important part of that social contract is ensuring that the price stability that has been achieved UH in central banks, that we should not at any moment loose sight of that mandate. UM. I would also add that, unfortunately for all of us who were economists, economists don't have a great track record in predicting turning points, and I think we are at

a very tough spot here. On one hand, you have the concerns that premature tightening would undermine a recovery from the worst hit that the global economy to my knowledge, has seen. We're coming out of a very exceptional period, so there's the concerns of undermining the recovery. But at the same time. US inflation rates are at a thirty year high. If you look at consumer prices, and if you look at producer prices there are forty year high. And the concern of acting too late, too little, and

too late is a very real one. Is a very real one. In the aftermath of two thow th nine, we were, especially in the advanced economies, not so in the emerging markets, we were confronted with massive aggregate demand declines UH. In the current context, fast forward to COVID, we have both. We are both dealing with exceptional UH declines in aggregate demands but also all manner of aggregate

supply shops. So, and a lesson from the nineties seventies that was that central banks ability to stabilize economic activity in the face of supply shops is much much much to be questioned. UH, it's much more limited. So so we also have the danger I said, we have the danger of reacting prematurely and the danger of acting too little and too late. So it's and and if that trade off is not an enviable one in the advanced economies,

it's even steeper UH in the developed world. In developing world, where we've already seen a number of central banks do a very aggressive rate heights, and not coincidentally, it very much relates to the social unrest that countries like Brazil are saying over what are spiraling food and energy crisis. I do have the concern that if we continue to view this as a very transient feature, that response may indeed mimic some of the errors we saw in the

nineteen seventies. Let me stop there, Thank you comment, doctor Isabel. I think this will be the debate that we are going to have going forward. I mean, in them over is past decade where inflation was always below the target, we we basically I mean we were facing shocks both on the supply and on the remand side that we're more deflationary. But it may actually be that we are that this is now changing. And one reason why why

it is changing is actually the green transition. And I mean, if you if you think about something like carbon prices, you can of course think of it as like supply side shocks. And we will have many of those going forward again and again and again and again, and then the question comes up, what are we going to do about it? Can we say that we are just going to look through all of that, even though of course it does we use the purchasing power of people. And

this is a very difficult topic. I think we need much more research on there. It's an open question, but these are very difficult questions, and I think there's not yet a good answer to that. Our economists have just done some research into into this which talks about the likelihood of more and more shocks to inflation, but also the inflationary impact of just moving to a higher carbon price.

You know, there's a there's a straightforward impact of that, and then there's, as you say, the potential for lots of more a lot more variability of inflation and supply

side shocks on either on either side. Um militia. When you were talking earlier and you were talking about the importance of the central bank flagging up the potentially unequal impact of its policies in this in various ways, I guess I was wondering, Okay, but what do you do if you haven't got a well behaved government, if you haven't got a government that actually responds to any of your um careful explanations of what they might want to do to correct the impact of your policies, And if

you have a government that isn't putting in place and a good environment for for investment and isn't discouraging people from doing lots of precautionary savings by having good social safety nets. So what a central banks supposed to just wash their hands at that point? Well, I think it goes in two steps. I mean, I think you know the first step is you, uh, you share the analysis

with the government. And I think most of us have been in central banks now that central banks tend to be slightly better resource than ministries of finance and they have don't tell anyone they have deeper analytical capacity than

ministries of finance UM. And I think those initial that first step can be done behind closed doors and saying here's what our analysis shows is happening to income distribution, this is what our analysis shows is happening to food price is and what that means for certain types of household for certain parts of the country, um and and giving elected political leaders at least the information so that they can't say we didn't know that this was happening.

I think that's that one. I think it's that too, if, as you say, Stephanie, there's a government that's actually unwilling to act. I don't think that should change central banks adherence to their mandates, and they should subviously say, ah ha, we will be the white knight who will resolve the

income distributional or climate change consequences. But I do think, you know, there have been many brave central bankers in recent years who have gone public with some of this kind of analysis, uh, and simply just by putting it in the public domain but not necessarily acting on it, I think can be quite powerful. Uh. And so that's what I would argue should be done in cases where governments are unwilling to deal with some of these wider consequences.

I actually had this this comment already when I I heard um news very nice remarks. I actually think we have to go as central banks, we have to go a bit beyond what she said. So I think it's it's not enough to simply tell governments so you see here there's a distributional problem, please do something about it. Um. So. I don't think that's enough, because of course we do have some leeway what we do precisely, so we have

lee way which tools to use. And if we know that that certain tools have UM stronger distributional consequences than others. That may be an argument for using one tool and not the other. Similarly, it may actually affect the calibration of our tools. So for example, I mean in our strategy we have this concept of the medium term um which which gives us a bit of flexibility regarding the question.

At one other point I would like to to us is that, of course one one cannot take the position that central banks should not care at all about distributional effect because I mean, these distributional effects out of course there and the way we act does have these effects. Or we are not. We are never neutral. We are never neutral, and I think we cannot we cannot ignore that, but we we have to, and we have to raise awareness of that and have to be honest about that.

Ellen has had a great question, which I think because we're not we're not going to end up with that much time. But I'm interested in what any of you think about it. So she was she suggests um that central banks seem like it's a policy success. You know that we've had these institutions that we made independent and that made policy better, and they were able to look through the political cycle and cooperate with one another to

achieve global objectives. Um. Should we be looking to reproduce that model for other crucial public goods like not least getting an effective carbon price? Um? And she suggests maybe having independent carbon councils for setting carbon prices. But just wonder, I mean, even if we don't think there could necessarily be a global Carbon Council tomorrow unless unless COPED twenty

six does something very interesting. Um, But is that? Do we think there's there's other areas of public policy that we should be following the central bank model minusia maybe? Or well, I mean it's interesting there are some domains in which it's been possible to d politicized aspects of decision making, and central banks are a really good example. Many countries have independent fiscal councils now which independent of the finance ministry, assess the budget and report on fiscal

policy in a neutral way. There's about forty or fifty of them now spread around the world. In the US they have the base Closure Permission, Yes, base Closure Commission, that's right, that would take a neutral view. In some countries, uh, the definition of voting districts is done by an independent entity that does it on a scientific basis to de

politicize it. I mean, you know, as a lifelong technocrat, I have a lot of sympathy with these kind of approaches because it it makes decisions on a rational basis, It does all the things that Ellen says in her and her question, which is it's you know, rational, accountable, independent, etcetera. So I would love I would love to see more aspects of government policy being subjected to that kind of rare.

But the truth is we're in a moment of kind of nationalism and populism and and increasing you know, wearing a mosque has become political um and so it feels like we're not at a at a moment when taking things out of the political realm seems very likely. But I do think we need to keep thinking about where

those opportunities are. And maybe you're right, maybe carbon is the one is the next place where thinking about just as an example, uh, you know, one of the biggest issues with carbon markets is that, uh there is uh there is complete inconsistency in the way that carbon credits offsets emissions trading. It's the wild West. I mean I know this personally because the LC just announced that we're the first carbon neutral university in the UK. But when we went to try and buy carbon credits it was

the wild West. I mean it was it was completely unregulated and we had to work really hard. And that might be an area where, for example, independent entities could be created to do verification. At the moment, there's a

proliferation of lots of little NGOs that do this. But if we're going to have a serious carbon market and financial inst tuitions are going to have to verify this stuff, maybe we need an independent entity that isn't the Central Bank but looks like an independent institution that would enable that market to function. And maybe there's enough political support that we might actually get it in that domain, even

though we can't get it happens. So the environmental equivalent of the of the generally accepted accounting principles, which many people would say had made played a very big role in exactly global capitalism globalization. Carmen or or Isabel, what do you think about this suggestion? Well, let me say that a concern that I have at the moment is that the pendulum actually is swinging in the other direction.

Central bank independence was a really big movement. It really took of course route first in the advanced economy and then spread to the emerging markets and developing countries. So my concern in response to her lens question, is that in this more politicized environment, more much more by modal views, if you will, bipolar by modal views, if you will, the pendulum is actually unfortunately moving in the opposite, in

the artosite direction. I wanted to sort of I'll go back to this question of distributional consequences, but it relates to some of the things that we were saying about the changing political climate. People are blaming central bank policy for uh penalizing savers and increasing wealth inequality, and many populous leaders are making central bank scapegoats for you in their arguments against the current system. So I guess I want if we stick with this line that you can't

really intervene on the distributional front. You can only kind of urge and explain. Is there a risk that you'll be sort of damned either way, you know, because you'll be considered to have had all of these negative political implications and your your independence is compromised by that, maybe even taken away because you didn't act on the distributional consequences it's about. So let me say first that of course it's I mean it starts with communication. So communication

is extremely important. We often see that people don't understand what we are doing. And this is not just people who are not very well educated in economic terms, but it's even leading politicians who don't understand what what we are doing. And I mean they're the first thing, of course, we have to do is to explain as much as we can in a language that people understand. I mean, this is um something we have to deliver. We cannot ask them to first get an economics PhD. But we

have to explain it so that people understand it. Then I think we have to be honest about the side effects of our of our policies, and we have to be able to explain why we believe that the benefits are larger than the costs. If we cannot say that, then probably we shouldn't follow those policies. So and and then of course meets we have to do this analysis. I mean, that's of course also something that we that

we have to do. UM. But the problem is that there are times when all of this is even more complicated, and I think we are in such a time now. So for it's quite some time we have been arguing, Okay, our instruments have all these side effects, but see inflation is so low, we have to do it. But now what people are seeing is so they're still doing all those things. The side effects are getting maybe even bigger. But inflation is it five percent or it's approaching five

so um and that becomes extremely difficult. And I still don't know how to solve that problem. But I mean, this is kind of the situation that we're facing now, and that indeed um then also poses a threat to our independence because we do see that many politicians now speak up and say are they still following the mandate or not? And we have to keep that in mind. Niche risks to central banks. Do you think they're in this perilous position that actually in different ways Carmen and

Isabel have described slightly different ways. I think the dangers are greatest in some of the emerging markets that Carmon identify in terms of risk to central bank depends. In the wake of COVID, many emerging market central banks did things like QUEI that they had never done before and adopted policies that were being used from the advanced economies, and in some of those cases, the arguments that this

was fiscal dominance I think is kind of compelling. Actually it did look an awful lot like fiscal dominance in some countries, and that's worried and that's sort of a step in the direction of eroding independence. Um. You know, I think in the advanced economies, I mean, I agree with Isabelle, it depends how persistent this supply driven inflation is. If it passes uh, then I and it is transitory, as most advanced economy central banks seem to think, then

I think the independence is not so threatened. Um. But if it, if it is more persistent, then I think the kind of trilemma that she described of you're doing these rather you know, these very loose monthly policies, You're having all these spillover effects and you're you're still not delivering your inflation target. It becomes a bit of a problem. And I think center brates were able to hold onto their independence because they were so successful for so many

decades at delivering the inflation target. I mean, it has been one of the main the biggest policy successes that we have seen in the last thirty years. Um. And so I do think that's the key to to this dilemma. It's sobering we've ended this way, But I guess I should also recall that we started off thinking about whether the job should be bigger than originally intended, and we've ended up worrying most about whether Central Works can continue

to do their core job. And I guess we should also recall that this has not been a problem that we have talked about very much in these kind of conversations for quite a long time, and maybe that's sign of some kind of program. Um. It's been fantastic, and we could carry on for many more hours. Um. But thank you so much to Ellen for helping to bring together, Ellen Ray for bringing together people in this this conference all day, and especially to Isabel Schabel and Carmen Reinhart

kind of Minish Baroness Shafiq for this great conversation. That's it for this special women omics edition of Stephanomics. We'll be back to normal next week with the curious Case of the Missing US worker, among other things. Join us then, and in the meantime, if you like the program, please do rate it and follow at Economics on Twitter for more news and analysis. From Bloomberg Economics. This episode was

produced by Mangnus Henryson. With special thanks to the Center for Economic Policy Research and especially Professor Ellen Ray for inviting me to a joint conference with the European Central Bank. Also to Baroness Minus Shafiq, Dr Carmen Reinhardt and Dr Isabel Schnabel. Mike Sasso is executive producer of Stephanomics and the head of Bloomberg Podcast is Francesco Legi.