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

The evolution of modern central banking: What happens next?Central bankers did more than counter the ‘sudden stops’ that engulfed the globaleconomy at that time 11 . They also turned around the underlying path dependencydynamics – from a series of increasingly disruptive multiple equilibria to a steadilystabilising cycle.While the US Federal Reserve evolved to a second analytical phase thereafter (seebelow) – and helped by a private banking system that was forced to strengthen itscapital cushion, deal with bad assets and start to alter system-disrupting internalincentive structures – the ECB was not so fortunate.An incomplete Eurozone architecture (see Baldwin et al. 2010), together withinadequately capitalised banks and too many politicians in denial, forced the ECB backinto extreme crisis management in 2012. Its series of interventions culminated in ECBPresident Mario Draghi’s historic remarks in London on 26 July 2012, assuring theworld that “within our mandate, the ECB is ready to do whatever it takes to preserve theeuro”. And to leave no doubt, he added: “believe me, it will be enough” (Draghi 2012).Historical context: Targeting macroeconomic outcomesThe second phase of extraordinary central-bank involvement has been less successive;and the legacies are likely to be much more consequential for the functioning of theglobal economy.Faced with unusually sluggish growth and persistently high unemployment (what mycolleagues and I labeled the ‘New Normal’ back in May 2009 (El-Erian 2009) andrecognising that other policymakers were hampered by a combination of internal inertiaand political constraints, central bankers shifted to targeting macroeconomic outcomes.This transition started with the Fed and the Bank of England. Under immense pressurefrom a newly elected prime minister, the Bank of Japan joined in early 2013. It did so1 The term was first used by Guillermo Calvo during the 1980s Latin American debt crisis.67