Is inflation targeting dead? Central Banking After the Crisis - Vox

Who killed the inflation target?However, the main reasons why economic growth has been disappointing are not directlyrelated to monetary policy. They are largely linked to the excessive debt accumulated byeconomic agents and financial institutions before the Crisis and the structural rigiditiespersisting in some economies, in particular in the Eurozone. As Reinhart and Rogoffhave shown, the recovery from debt overhang is typically painful and slow.The responsibility of governments and bank supervisorsThe main responsibility for addressing these causes is outside central banks. Structuralreforms in the labour, goods and capital markets are the responsibility of governmentsand parliaments. Bank recapitalisation – to improve the functioning of the creditchannel – is mainly the responsibility of supervisors and of governments, especiallywhen it requires taxpayers’ money. Easing the burden of debt overhang for some sectorsof society – in particular with a view to achieve a fairer distribution of adjustment – isalso the responsibility of the fiscal authorities.The problem is that the margins for manoeuvre to implement these actions is currentlylimited, either by the dire state of public finances or by the reluctance of electedpoliticians to take unpopular decisions which may jeopardise their chances of beingre-elected. Recapitalising the banking system, as needed in several European countriesto ease the credit crunch, would further raise the public debt and is generally quiteunpopular, given voters’ reluctance to use taxpayers’ money to bail out banks. Goodsand labour market reforms are also politically difficult, being opposed by interestgroups, lobbies, and unions. Restructuring the debt borne by some parts of society –such as homeowners or students – can also strain the budget and be politically verycontroversial, as experienced in the US.It’s not easy to socialise losses in democratic systems. But there may be a way out.Indeed, the job could be delegated to the central bank. Central banks can reducethe burden of the debt by purchasing large amounts of risky assets from banks andinstitutional investors and hold them to maturity in their balance sheets. Potential losses33