The Democratic Accountability of Central Banks
There is an interesting article in today's Daily Telegraph which argues that central banks around the world need to be less independent and more accountable to politicians (click here). The inflation targeting regime, which was popular over the past two decades, is no longer acceptable to governments who wish to monetise huge amounts of their debt (aka quantitative easing) as such regimes keep inflation too low. Mervyn King, in a speech in Belfast last night, conceded that after 21 years, inflation targeting needs to be reassessed, but he thinks that to abandon it would be irresponsible.
I have great concerns about placing monetary policy in the hands of non-accountable central banks or in the hands of politicians who will be tempted to use the monetary system for their own short-term ends. What is the solution? One possibility would be to return to a commodity-based monetary regime such as the Gold Standard. However, full-franchise democracies and commodity-based monetary regimes may be incompatible.
Click here to read Jeffrey Frankel's view on inflation targeting and the possibility of a return to the Gold Standard, which Frankel sees as a relic which should be left to gather dust.