Central Banks and co-ordinated policy

This blog had been arguing for sometime that given the global nature of inflation today, independent actions of Central Banks on the monetary policy front will provide limited or only temporary relief. A previous post had even suggested that Central Banks across the world should co-ordinate and raise domestic interest rates uniformly, not to combat inflation but to slow down growth. (Kenneth Rogoff had been advocating the "forced slowdown" hypothesis for sometime)

Now Adam Posen and Arvind Subramanian have called for a joint approach by global Central Banks to reducing global inflation, centred on a common public commitment to tighter monetary policies. They compare the strategies of Central Banks to a game of "chicken", wherein each Bank is attempting to duck the pain of monetary contraction, hoping that others will bear the burden of adjustment.

Though ECB and some of the major emerging economies having tightened policies, the desired impact will not be achieved without similar action by the US Fed and the People's Bank of China. Such co-ordinated action will send a strong signal and thereby anchor market expectations on inflation. The extent of monetary tightening of course should and can be left to the individual Central Banks.