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  • rmacculloch

Can politicized central banks keep their "independence"?

One of the very best US economists, who is based at Stanford University, John Cochrane, has written an article slamming central banks who have taken up the cause of fighting climate change. He strongly believes that pollution needs reigning in due to its terrible effects on the planet and advocates carbon taxes as a way of doing so, but argues that central banks are not the place to address this issue.

By implication, his comments are squarely aimed at our own Reserve Bank of NZ which states in its publications that:

"Our climate change strategy focuses on ways in which the Bank can contribute to efforts to mitigate the effects of climate change. These include managing our own direct impact on the climate, reflecting climate risks within our core functions, and contributing to wider efforts to identify, monitor and manage climate risks within our economy and financial system, and as part of the global central banking and regulatory community".

Furthermore, the RBNZ Governor took part in a round table discussion with Climate Change Minister and Green Party leader, James Shaw, in May of this year during which the Governor stated how "Climate change and its associated risks provide a direct challenge to financial stability" and that "We will keep going harder on climate".

According to Mr Cochrane, the Bank is flat out wrong. He states: "Let me speak out loud the unclothed emperor fact: Climate change does not pose any financial risk, at the 1, 5 or even 10 year horizon at which one can conceivably assess the risk to bank assets".

He concludes by saying:

"This will end badly. Not because these policies are wrong, but because they are intensely political and they make a mockery of the central bank’s limited mandates ... A central bank that so blatantly breaks its mandates must lose its independence, its authority, and people’s trust in its objectivity and technical competence to fight inflation and deflation, regulate banks, and stop financial crises .. The western world faces a crisis of trust in our institutions. And that crisis is fed by a not inaccurate perception that the elites who run our institutions don’t know what they are doing, are politicized, are expanding actions beyond the authority granted by accountable representatives ... Central banks must be competent, trusted, narrow, independent, and boring. A good strategy review should refocus central banks on their core narrow mission, and let the other institutions of society address big political causes. Boring as that may be".


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