Monetary policy as economic warfare - Yannis Varoufakis, Adults in the Room: My Battle With Europe's Deep Establishment, London, Bodley Head, 2017, 550 pp., £14.99 (pbk), ISBN 978-1-847-92446-9

Abstract

At least since the publication of ‘Rules rather than discretion’ by Nobel Prize winners Kydland and Prescott (1977), an undisputed principle in monetary economics is that central bankers should be politically independent. Politicians have an electoral incentive to jack-up the money supply to finance programmes the electorate favours, ignoring the inflation this will result in. Monetary policy is therefore best separated from fiscal policy, leaving the latter to politicians, while entrusting the former to central bankers, whose sole calling is to ensure moderate inflation and financial stability by determining the conditions (i.e., interest rate and collateral) under which private banks can borrow from the central bank. Although central banks’ independence might be undemocratic, it is nonetheless in the long-run interest of the citizenry.