G

iven the enormous impact of a central bank on economic stability, some recent reports in The Jakarta Post raise questions about the competence of Bank Indonesia policy choices.

First, Dian Ediana Rae, executive director and regional head of Bank Indonesia for Sumatra, is quoted on what she considers the primary cause of rising consumer prices. ('€œIt is well known that the main cause of inflation in developing countries, including Indonesia, is supply-side issues such as production, distribution and transportation.'€)

This is an alarming claim given a near unanimous agreement among economists that rising price levels are fundamentally caused by excessive rates of growth in the money supply.

Much of the remainder of the opinion-page article is rife with a mixture of obfuscation and gobbledygook relating to discussion of '€œunconventional monetary policy'€. As it is, the jury is still out on whether the net effect of '€œunconventional monetary policy'€ will be beneficial.

For its part, the Bank of Japan initiated this track in the early 1990s, but Japan'€™s economy remains far below its long-term trend. Meanwhile, the impact of the '€œexit strategy'€ of America'€™s central bankers from their experiment, as much as they have one, remains to be seen.

Another indicator of poor economic analysis is found within a recent front-page article ('€œDeflation paves way for rate cut'€). The first sentence asserts that '€œIndonesia recorded deflation in January ['€¦] '€ While price deflation is conventionally understood as a decline in overall prices, this blip in more likely reflecting a decrease in the rate of increase of overall prices.

In the first place, it is absurd to use the word '€œdeflation'€ in the Indonesian context, when the Central Statistics Agency reports that the consumer price index is rising at a rate of 6.96 percent.

... international capital flows no longer have a disciplining effect on monetary mismanagement.

Second, it is incoherent, since measures of price level change reflect trends, and the story reported that the measured declines arose from a one-off lowering of fuel prices.

In the same article, it is mooted whether Bank Indonesia will lower its benchmark interest rate in response to a one-month decline (or pause in the increase) of the overall price level.

Such a suggestion may be consistent with delusional thinking by politicians but it flies in the face of sound economic analysis.

For his part, Vice President Jusuf Kalla has called for Bank Indonesia to '€œslash'€ interest rates to boost growth. Perhaps a bit of recent economic history is in order here.

Japan and the US have had near-zero interest rates (and the euro-zone economies have negative nominal rates!) for a very long time but still await gains in economic growth. As it is, gains in US economic growth are primarily due to plunging energy costs on the back of the '€œshale-oil'€ revolution.

Indeed, it might be argued that low interest rates are the cause of sluggish growth when you look at countries where central bank policies have driven rates relentlessly lower. This can be seen by noting that monetary expansions in modern economies are primarily conducted through commercial bank lending.

Central bankers'€™ efforts to drive interest rates to absurdly low levels create distorted incentives for bankers. At near-zero (or historically low rates), the spread between what banks pay depositors and earn from lending narrows, so that funding private-sector loans can be unattractive.

Bank loans made to private business or consumers are both costly and risky. Besides regulatory costs associated with such lending, there are high administrative costs for assessing collateral, collecting payments, etc. There are also relatively high risks of business failures, or insolvency of consumers that may lead to defaults.

If banks seek lower risks and costs, then lowering interest rates will not lead to more activity in the real sector of the economy where jobs are created. Instead, banks may buy lower-risk government bonds or lend to their '€œbest'€ customers, i.e., the 1 percent.

Low borrowing costs encourage borrowers to take greater risk and divert bank funds into more speculative assets, like property or stocks. As such, artificially low interest rates in the US can explain asset-price '€œbubbles'€ that have driven income and wealth inequality, as well as its slow-growth economy.

Finally, claims that Bank Indonesia is an independent central bank are mythological, at best. Monetary economists have always viewed eliminating political interference with central banks as a '€œholy grail'€ that would lead to better, more effective policy choices. But the volatility of the rupiah and a poor record on price inflation provides little evidence that BI has pursued its goal of achieving and maintaining currency or price stability.

As it turns out, central banks around the world have abdicated their sovereignty to take signals from policy decisions made by America'€™s central bankers.

In turn, most central bankers have increasingly tended to move in tandem, partly to avoid losing export competitiveness from currency realignments.

With so many central bankers pursuing the same policies, international capital flows no longer have a disciplining effect on monetary mismanagement.

In the past, poor choices by a single central bank would lead to capital outflow or inflows that would force them to reverse an isolated policy agenda.

Now, nearly all central banks are collectively making bad choices with fewer consequences and with the authority that they are following all the others. Alas, this turn of events has led to growing domestic imbalances that could presage economic calamity on a global scale.