Former central banker and professor of finance at Chicago’s Booth School of Business, Raghuram Ranjan has expressed concerns over global central banks’ framework of handling inflation.
In his opinion report in Financial Times, Rajan pointed out how nobody anticipated the impending crisis of inflation bothering all realms of the global economy.
Central banks have enough influence to garner an audience of trust in institutions. Such credibility comes as a result of a mix of past outcomes, policy tools, and policy driven frameworks, said Rajan,
However, this credibility alone cannot help them sail through the crisis in a smooth manner and by its very nature, credibility does not turn on a dime, he added.
The situation at hand requires us to deal with tackling high inflation, which remains drastically different from countering the regime of low inflation, when the Fed regained its credibility, perhaps under the influence of Paul Volcker, said the former Reserve Bank of India Governor.
Technocratic central banks gained ground and equipped with an inflation targeting framework, thus regaining their title of “inflation firefighters”, said the former IMF economist and added, following the global crisis, inflation fell below the benchmark, reinstating the need to push it back.
Rajan said central banks tried a new move, rather than fighting inflation ferociously, they chose to “credibly promise to be irresponsible” in the words of Paul Krugman.
With newer tools in hand, the central banks remained slow in raising rates in late 2021, he said.
Finally, they switched their method to embed inflation tolerance within them. This new structure, adopted in 2020, was different from pre-emptive repulsion of inflation, said the former central banker.
However, this came in very late, at a time when inflation was directly staring the global economy in the eyeballs, warned Rajan, adding this proved to be rendered ineffective given that the banks would not drastically increase interest rates.
With the pandemic and the Ukraine war, a pushback happened to increase the inflation rates at a striking rate, and the series of events exposed the dubious nature of credibility of the central bank’s role to demonstrate a hawkish stance in terms of inflation, said the former RBI governor.
With the loss in credibility and changing inflation regimes, the environment is bound to change again, he added.
Nonetheless, central banks still remain to be the most effective as they commit to fight inflation on a global scale, with an effective delegation of responsibility to governments and private sector, they could aim to sustain long term growth, said Rajan.
For all the latest business News Click Here
