Supervising the supervisors

September 14, 2011

A new Brookings Institution report from the self-appointed Committee on International Economic Policy and Reform suggests that, given a spotty recent record, supervisors and policymakers at the world’s top central banks need to be watched themselves. The group of 16 high-profile economists and financial experts, which includes former Brazilian central bank chief Arminio Fraga, Berkeley professor Barry Eichengreen, Harvard’s Kenneth Rogoff and Mohamed El-Erian from Pimco, proposes a new international watchdog that might ensure actions taken by individual countries are coordinated and smoothed out:

We call for the creation of an International Monetary Policy Committee composed of representatives of major central banks that will report regularly to world leaders on the aggregate consequences of individual central bank policies.

The proposal comes as the Federal Reserve, faced with a weakening U.S. economy, ponders another round of unconventional monetary stimulus. Many analysts believe the Fed will take some type of step to support low long-term rates at its September 20-21 meeting. When the Fed implemented its second round of bond-buying, it came under harsh criticism from emerging economies for pushing up their exchange rates with ultra-low rates in the United States.

The Brookings report suggested the Fed’s go-it-alone approach can be self-defeating:

Central banks are more likely to safeguard their independence and credibility by acknowledging and explicitly addressing the tensions between inflation targeting and competing objectives than by denying such linkages and proceeding with business as usual.

The panel urges explicit international coordination — however politically unfeasible.

The cross-border spillovers from monetary policy provide yet another reason for rethinking not just the domestic monetary policy framework but also mechanisms for ensuring compatibility between large-country policies.

Best of luck, ladies and gentlemen.

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