Central Banking in Turbulent Times

Abstract

The book describes the long and difficult process that led to the central banking model prevailing in most advanced economies at the end of last century. The critical institutional basis of that model is an independent central bank with price stability as its dominant objective. The book, which looks in particular at the Federal Reserve of the United States (Fed) and at the European Central Bank (ECB), also presents the essential components of that model, while noting that financial stability did not fit well in it and was the neglected child of central banks before the Great Recession. The book then illustrates the hits that the Great Recession delivered to that model and asks whether a radical rethinking of the model is necessary. In particular, it examines whether the renewed importance of the financial stability objective, the blurred borders between fiscal and monetary policies, the moral hazard created by the central bank’s forceful actions, and, finally, the actions of the ECB to protect the euro have jeopardized the pre-crisis central bank model. The answer to this question is that, while it is not possible to simply return to the pre-crisis central bank model, the adaptations that are needed are more incremental than radical when considered in a long historical perspective. They nevertheless require changes in the statutes of both the Fed and the ECB, and thus will have to overcome a high institutional hurdle.

A Tale of Two Decades: The Ecb's Monetary Policy at 20

“…For a far more exhaustive account of the liquidity crisis, seePapadia and Välimäki (2018).ECB Working Paper Series No 2346 / December 2019…”

‘Building back better’ or sustaining the unsustainable? The climate impacts of Bank of England QE in the Covid-19 pandemic

“…Market neutrality has been located in the desire to depoliticise the growing power of Central Banks in order to maintain technocratic legitimacy and operational independence from elected bodies (Best 2016 ; Tucker 2018 ; Papadia and Välimäki 2018 ; Dӧnmez and Zemandl 2019 ; Klooster 2022 ). Following Klooster and Fontan ( 2019 ), “central bankers… are openly concerned that the use of unconventional tools threatens their independence (Group of Thirty 2015 ; Goodhart and Lastra 2018 )” and “central bankers, accordingly, try to counteract repoliticisation and these efforts shape their policies”.…”

Democracy and the European Central Bank's Emergency Powers

“…In this sense, the ECB retains operational independence in dealing with the crisis, but it cannot by itself decide when to exercise its emergency powers. Francesco Papadia and Tuomas Välimäki (), for example, argue that during a financial state of emergency, central banks should return to parliament to ask it for permission to prioritize financial stability over price stability. This proposal is modest in that it still leaves the central bank with considerable independence in deciding how to deal with the crisis.…”