What Exactly is the Role of an Inflation-Targeting Central Bank?

May 26th, 2015
in Op Ed

Hypocracy about "Rules" in the Eurozone

by Dirk Ehnts, Econoblog101

I have always thought that an inflation-targeting central bank is independent because it follows a clear goal: get inflation to fall in line with the target in the medium term. What I cannot understand is what ECB and Bundesbank are doing.

Follow up:

The New York Times reports:

The European Central Bank has called on governments in the eurozone to clear away bureaucracy that burdens businesses and loosen rules on hiring and firing workers. The goal: bring down chronically high unemployment rates.

Sorry? How is it possible that with no major changes in "bureaucracy" Spain has seen its unemployment rate rise from below 10% to before the crisis to 23% today? Or did the case for more labor market flexibility exist before the crisis? After all, the country with one of the least flexible labor markets is Germany, which has an unemployment rate of 4.7% according to the NYT. As far as I can see, Germany did not institute any major reforms of the labor market since the crisis broke out. Actually, the country just introduced a minimum wage of €8,50 this year - and it is still growing!  How does the ECB have a mandate to issue these kinds of statements that fly in the face of empirical data?

The same goes for the Bundesbank. Deutsche Welle, run by the German government, reports:

Germany's central bank has expressed its dissatisfaction with the reform process in Greece. In its latest monthly report, it said Athens would not be able to avoid bankruptcy without changing its course in negotiations.

Once again, I wonder where this is coming from.  Does the Greek central bank in its monthly reports express its dissatisfaction with the reform process in Germany?  After all, the country (Germany) has a net export surplus of more than 8%, which is completely against the rules. The Bundesbank does not say anything about this in its monthly report.  However, Bundesbank president Weidmann is represented on the homepage with an interview by Handelsblatt.  Weidmann complains that the German central bank, if perceived to shift the boundaries of monetary policy, will find it harder to fulfill its mandate. If he is the president of Bundesbank (which he clearly he is), how is that compatible with the statement on Greece in its latest report?  How does "dissatisfaction with the reform process in Greece" fit with an inflation target of a little below 2%?

The euro zone, I argue, is a disaster because of the separation of fiscal and monetary. The ECB bails out banks, not governments. This leads to blackmailing sovereign governments into reforms that they would never have undertaken because the people would never have voted for austerity. The way that Germany handles its newfound power is destructive, imposing poverty and stagnation on the periphery.  Central banks - ECB and national central banks - have found a new, enlarged role for themselves.  I wonder:  How does the public benefits from this change?

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

 navigate econintersect.com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved