Against Amnesia: Re-Imagining Central Banking

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The purpose of the present paper is to identify and challenge contemporary adherence to the core of the prevailing monetary policy consensus. This consensus consists of what we call the holy trinity of the inflation targeting paradigm: price stability as the primary goal of the central bank; central bank independence as the institutional arrangement; and the short-term interest rate as the operational target. Drawing on the literature on the history and political economy of central banking, we argue that the inability to think beyond this holy trinity stems from a severe case of collective institutional amnesia and comes at a heavy cost. We highlight that monetary policy can be deployed towards social purposes other than controlling inflation, in institutional configurations other than isolation from the rest of the government and with instruments other than interest rate manipulation. One central message is that whereas central banks are commonly portrayed as commanding only one instrument, in reality they have a battery of instruments at their disposal. We should think of central banking not as a hammer – a tool to hit inflation where it rears its ugly head – but as a Swiss army knife – a multi-purpose tool with many instruments.  Doing so will help overcome the collective amnesia that stands in the way of an enlightened debate about how the power of central banking can – and perhaps should – be harnessed in the pursuit of collective social goals.