The central banks became independent during a period that one might be able to call the “golden age” of inflation targeting, when everything looked relatively straightforward – when the policy rate was in principle set to attain price stability and when one took financial stability more or less for granted. The world that now appears to be emerging is more complicated. It is necessary to reconsider where the boundary lines should be drawn between what should be delegated to independent central banks and what should be managed by the political system. Finding the best way of doing this is one of the major challenges ahead of us. 17  See Gerlach (2013). Results from a study by Bech, Gambacorta and Kharroubi (2012) indicate that monetary policy is less efficient when it comes to counteracting a recession and contributing to a recovery after a financial crisis. Posen (2013) says that more powerful quantitative easing would have facilitated the recovery in the United Kingdom, but that the fact that this was not implemented has nothing to do with inflation targeting and it would not have been easier with a different type of monetary policy. 18  See, for example, Banerjee, Cecchetti and Hofmann (2013). Whelan (2013) says that inflation targeting should actually be abandoned in favour of a solution where the central banks are given a broader mandate and more instruments at their disposal.
It remains to be seen how well they will succeed and how confidence in the central bank as an independent institution will be affected, as well as what consequences this might have. Independence not a given – the central bank may also need to adapt I think that it is important that the central bank never takes its independence for granted. It should always ask the question of whether the policy it conducts can be expected to result in the economic development that was aimed at when the central bank was granted its independence. An important part of this is, of course, that the central bank does its best to attain the objectives it has been allocated. But another part, which has perhaps not received as much attention, is that the central bank must also take into account fundamental changes in the economy that may make it necessary to adapt its behaviour. There could be many examples of changes in the functioning of the economy that could trigger such a need to adapt. But let me illustrate what I mean with an example that has been highlighted, for instance, in the IMF’s most recent World Economic Outlook. A slightly surprising observation in recent years is that inflation has not fallen very much during the recession connected to the financial crisis, despite a dramatic fall in demand in many countries and a sharp rise in unemployment. The contrast in relation to earlier economic downturns, when inflation fell much more, is fairly surprising.