The economic challenge
Is there room to fight the next recession?
By allowing financial markets again to dictate monetary-policy changes, both the ECB and the Fed poured more fuel on a fire that has been raging for years. Financial markets have been driven from one record high to another, regardless of the underlying economic fundamentals, because traders and investors have been conditioned to believe that central banks are their BFFs (“best friends forever”). Time and again, central banks have proved willing and able to step in to suppress volatility and keep prices of both stocks and bonds elevated.
Central Banks Face a Year of Mounting Challenges
By: Mohamed A. El-Erian – Cambridge University
The institutional challenge: independence
Claudio Borio argues that central bank independence is closely tied to globalization as both are based on an intellectual and political environment that supports an open system in which countries adhere to the same principles and governments remain at arm′s length from the functioning of a market economy. As a result, “the fortunes of independence are also tied to those of globalisation”. He suggests three steps to safeguard independence:
- Make a clear distinction between crisis prevention and crisis management;
- Make the price stability objective more flexible;
- Reduce the expectations gap between what central banks can deliver and what they are expected to deliver, and in particular dispel the notion that central banks can be the engine of growth.
Central Banking in Challenging Times
Author: Claudio E. V. Borio
From: BIS
The intellectual challenge: the way forward
Central banks are the public instrument that allows societies to do whatever it takes, in the monetary-financial realm, to address the most pressing problems at a given historical juncture. Their reason to exist is not to prevent the inflation rate from rising above 2 per cent. Central banks exist because sovereignty requires the ability to exercise monetary and financial power in the pursuit of collective social goals. Many of the instruments needed to exercise that power happen to be folded into the Swiss army knife that is the central bank. Which of these instruments the central bank deploys is a question of which goals society mandates the central bank to pursue.
Against Amnesia: Re-Imagining Central Banking
Author: Benjamin Braun, Leah Downey
From: Max Planck Institute, Harvard University
