Central bankers face a crisis of confidence as models fail

The role of central banks is to set the short-term interest rate. Higher interest rates cool demand. The root of the current insecurity around monetary policy is that in advanced economies — from Japan to the US — inflation is not behaving in the way economic models predicted. While there have long been critics of the power of central bankers on the left and the right, such profound doubts have never been so present within their narrow world.  Continue reading →