Reforming the Federal Reserve for the 21st Century

With the Great Financial Crisis of 2007–2008, central banks in many parts of the world have once again been thrust into a key role – probably the key role – in macroeconomic policy. Fiscal policy made a brief entry onto the stage in the early aftermath of the crisis, but then was unceremoniously yanked off with the return of austerity thinking in the major centers of finance, government and departments of economics. Thus, central banks were left “holding the bag†with ideologically delimited, and tactically insufficient tools: manipulating short-term interest rates; and inappropriate operating instructions focusing only on keeping inflation in the low single digits. The major central banks – the Federal Reserve (Fed), the Bank of England (BOE) and, eventually, the European Central Bank (ECB) – ignored these ideologically constructed strait-jackets and invented new tools and gave old tools new names and new justifications in order to confront the calamity at hand.