–Adds Detail To Version Transmitted At 1151 GMT
–BOE Posen Questions Whether Central Banks Being Held To Account
–Central Banks Responded Initially – But Then They Stopped

LONDON (MNI) – Bank of England Monetary Policy Committee Member
Adam Posen has questioned whether central banks are being sufficiently
held to account for their policy actions.

In comments at a conference in Vienna, Posen made the point that
core inflation in the EU, US and UK is trending down and that money
growth is declining, but central banks are not acting.

“Core inflation has been decreasing … Central banks responded
initially, but then they stopped,” Posen said.

“I’ve argued that we’ve trended down and are still trending down.
Money growth has been declining as well. If all these indicators are all
acting in one direction, and central bankers aren’t addressing it, then
you have to ask if their feet are being held to the fire and (if they
are) not being held responsible”.

Posen said that he was ‘agnostic’ on the issue of recent exchange
rate tensions, noting that there was a downside and an upside to the
recent fall in the US dollar:

“…Let’s take as given, the Fed does more QE and the ECB doesn’t.
People have been concerned about the effects on the exchange rates. I’m
generally somewhat agnostic. One the one hand I don’t like exchange rate
conflict, on the other hand if we accept … that global imbalances
caused even partly the global crisis, doesn’t it make sense to unwind
the imbalance ?”

Looking at the US and Japan, Posen noted that there has been a
tendency since the 1970s for policymakers to delibetely underestimate
economies’ potential and this posed hazards:

“There is this sense since the ’70s that it is better to
underestimate potential. That agreed, we made a mistake in the late ’70s
in the US, but that’s not the only direction in which you can be wrong.
What happened in Japan in the 1990s was due to repeated underestimation
of Japanese potential”.

Posen – who backed a further increase in quantitative easing at the
last meeting of the Monetary Policy Committee of the BOE – has always
argued that the Japanese authorities did too little to ease monetary
policy during the stagnation of the 1990s.

The official also took issue with ideas that the supply potential
of economies might have suddenly collapsed due to the recessionary
impact on demand:

“Large rapid shifts, anything larger than half a percent, in trend
growth rates should be doubted. That’s different than arguing aggregate
supply can shift. I accept that aggregate supply can contract suddenly,
but there has to be a cause: a bomb, a flood, etc. It cannot just be
because we had a recession aggregate supply has disappeared. It takes
time for that to happen”.

He called for greater discipline in determining what is cyclical
and what is structural: “We need to be more disciplined about how we
decide what’s cyclical or not. Monetary policy should lean against the
cycle”.

Posen attacked both the Fed’s lack of a clear mandate as well as
what he sees as a lack of transparency/accountability at the European
Central Bank:

“The ECB has its famous 2 pillar system. With a pair of targets,
the ECB has been able to dodge meeting either one”.

“The Bank of England is far from perfect, but the point of what our
rules based system tells you is that we actually have to explain to
people why we’re doing what we’re doing”.

Posen made the comments at a conference hosted by the Austria
Marshall Plan Foundation and the Austria National Bank.

–London newsroom: 4420 7 862 7492; email: dthomas@marketnews.com

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