Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. This is the concluding part of an interview in which he discusses the rise of “inflation targeting” around the world. The first two parts are available here and here.
Alejandro Reuss: In your view what would be a preferable approach to central bank policy—what priorities should central banks have and how should they go about achieving these aims?
Gerald Epstein: Central banks should be free and open, in conjunction with their governments, to identify the key problems facing their own countries, the key obstacles to social and economic development, and developing tools and targets that are appropriate to dealing with those problems. And these are going to differ from country to country. So, for example, in South Africa, my colleague Bob Pollin, James Heintz, Leonce Ndikumana, and I did a study a number of years ago: We proposed an employment-targeting regime for the central bank. The Reserve Bank of South Africa, in conjunction with the government of South Africa, would develop a set of policies and tools—such as credit allocation policies, subsidized credit, lower interest rates, capital controls to keep the capital in the country, more expansionary and targeted fiscal policy—so that monetary policy and fiscal policy would work hand-in-hand to lower the massively high unemployment rate in South Africa. That’s an example of an alternative structure for monetary policy and one that has worked for other developing countries. So, for example, in South Korea in the 1950s ,1960s, and 1970s, the central bank supported the government’s industrial policy—by lending to development banks that would lend to export industries, by subsidizing credit for export industries, and they would do this as part of the government plan to develop the economy. I call this developmental central banking, that is, central banking that in combination with the government is oriented to developing the country using a variety of tools—interest rates, credit allocation tools, etc..
Not all countries would do the same thing. It not only depends on the country, but also on the problems of the historical conjuncture. So take the United States for example. Right now we do have for the Federal Reserve a dual mandate, which some Republicans are trying to get rid of, for high employment and stable prices. But the financial intermediation system is broken because of what happened in the crisis. Interest rates are down to zero but banks aren’t lending to the real economy. People aren’t able to borrow from banks for small businesses and so forth. The Federal Reserve, through quantitative easing, bought a lot of financial assets but it’s probably time for the Fed to develop new tools, to give direct credit to small businesses, for infrastructure development, etc.
It is the case now, with the crisis and with negative interest rates, or very low interest rates, central banks are being much more experimental trying to develop new tools, new approaches. But they’re all doing it under the guise of inflation targeting. European central bankers were doing all these wild monetary experiments, but their goal was really just to get inflation up to 2%. In fact, what’s happening is that this inflation targeting is no longer the guiding post for central banks. They have to him have much broader sets of tools and targets to get out of this terrible slump that most of these economies are in.
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