The drivers of the transformation of central banking since 2007
In this paper, Yuri Biondi delves into the transformation of central banking since the North Atlantic Financial Crisis of 2007-08, focusing on the shift from traditional monetary policy tools towards more unconventional measures in response to economic crises. He argues that this transformation has been driven by the systemic failure of market-based finance and the need for central banks to actively intervene in both public debt management and money markets.
- Systemic Failure of Market-Based Finance: The transformation of central banking is closely linked to the rise and systemic failure of market-based finance. This regime, which developed since the 1970s, was characterized by a transformative institutional reorganization of regional and cross-border financial systems, promoting active global financial markets and expanding the role of financial actors, motives, and ideas in the economy and society.
- Dependence on Never-Ending Refinancing: Market-based finance featured a financial system that was heavily reliant on marketable assets and short-term funding. This system was structurally dependent on a process of never-ending refinancing, which required continuous liquidity provision. Financial institutions, both banks and non-banks, operated under the presumption that funding would always be available and that financial assets could always be sold or refinanced.
- Liquidity Crisis and Central Bank Intervention: The reliance on short-term funding and the interconnectedness of financial institutions through instruments like repos (repurchase agreements) and other short-term credit arrangements led to a situation where the financial system became vulnerable to liquidity strains. When mutual distrust among financial actors triggered financial distress, the structural dependency on liquidity was exposed, leading to systemic failure. Central banks were compelled to intervene through money issuance and other ‘exceptional’ monetary policies to prevent a complete breakdown of the financial system.
- Central Bank Role in Public Debt Management: Central banks have also become more involved in public debt management, including its issuance and refinancing. This involvement has been necessary to manage the systemic risks associated with the market-based finance regime and to support financial stability.
- Challenges Posed by Pandemic Management and Climate Change: The coronavirus pandemic in 2020-21 and the challenges posed by climate change since 2015 have further called for active central bank involvement. Central banks have had to support public policies through exceptional monetary policies, which have included massive asset purchase programs and other forms of financial assistance to economies affected by lockdowns and other policy measures.
- Globalization and Dedollarization: Central banks have also had to manage cross-border transactions, including exchange rates and monetary reserves, in the context of an international monetary order under pressure. The emergence of alternative cross-border monetary arrangements and the potential dedollarization of international transactions have required central banks to adapt their interventions to support their respective currencies and to maintain financial stability.
[C]entral banking plays a role in managing public and private debts, money issuance including monetisation (money aggregates), and cross-border transactions including exchange rates and currency reserves management, beyond its better-known role in providing benchmark interest rate guidance. How to accommodate all these roles with the general interest is an open question which nowadays remains unfortunately unasked.
Central Banking in Perilous Times: An Open-Ended Chronicle
Author: Yuri Biondi
From: Centre National de la Recherche Scientifique (CNRS)
The macroeconomic and financial challenges faced by central banks
Kiley and Mishkin, in this paper, provide a comprehensive analysis of the challenges faced by central banks in the wake of significant economic crises including the largest financial crisis in generations, a global pandemic, and a resurgence in inflation.
- Price Stability and Central Banking: The authors underscore the critical benefits of price stability, highlighting it as a primary responsibility of central banks. Achieving price stability in a complex and uncertain environment necessitates a credible commitment to a nominal anchor, which involves a strong response to inflation and preemptive actions against an overheating economy. They argue that central bank communication and transparency are essential elements of monetary policy strategies and tactics.
- Financial Stability: The crises have accentuated the role of central banks in fostering financial stability, which is deemed crucial for achieving both price and economic stability. However, Kiley and Mishkin point out that this expanded role increases risks to the independence of central banks. They suggest that while financial stability complements the goals of price and economic stability, it can complicate the central banks’ efforts to stabilize inflation and economic activity.
- Challenges of Additional Goals: Kiley and Mishkin also discuss the potential difficulties central banks face when tasked with goals beyond price and economic stability, complemented by financial stability. They argue that these additional goals can make it more challenging for central banks to effectively stabilize both inflation and economic activity.
Given this complex landscape, central banks have a difficult job. Despite this, there has been some call for central banks to take on additional mandates, including issues such as inequality and climate change. These issues have important macroeconomic and financial implications, and as a result, central bank analysis to understand these issues is part of promoting price, economic, and financial stability. However, the central banks have limited tools and additional mandates for central banks may not be achievable given their tools.
Central Banking Post Crises
Authors: Michael Kiley, Frederic S. Mishkin
From: Board of Governors of the Federal Reserve System, Columbia University
