On central banks

[Central banks] have the power to create unnecessary fiscal problems. A fiscal squeeze can serve as an incentive against a “misbehaving” government that appears reluctant to adopt the structural reforms that, in the central bank’s view, may be in the long-term interest of a country. Validating default fears and high risk premia on government debt can be a potent tool to discourage what the central bank perceives as “moral hazard.” At times, independent central banks may be tempted to step outside their mandate and use their considerable discretionary authority to achieve what they perceive as better economic outcomes. How should this authority be used? Are the limits of democratic legitimacy respected?

If the interest rate projections do not effectively incorporate the influence of international economic developments on the domestic economy, then rather than effectively shaping expectations, the interest rate projections could potentially be an important source of monetary policy errors.