Reasons for the Crisis: Message 8/10

viii) Macroeconomics will move towards growth-targeting. 

Calls for central banks to go beyond inflation targeting are becoming louder.  Those calls range from asking central banks to target credit or asset prices, to plainly asking for targets on short-term aggregate demand or on the so-called "output gap".  Behind this, there is an increasing recognition that the state (not just the central bank) can and ought to target short-term growth.   This is reinforced by two related factors:  financial markets will remain dysfunctional for a while, and fiscal/monetary stimuli have recently been shown to work better when firms are credit constrained.  The question is which institution should be in charge of "growth targeting", and with which tools.   As central banks begin to lend directly to the private sector ("quantitative easing"), in effect they begin to manage a parallel and unlimited fiscal budget.  It is then a matter of time before Congresses lay claim on that budget, and the central banks lose their independence.